The market took quite a beating on Friday following the 60-minute reversal pattern we were following heading into the day. The Dow Jones Industrial Average ($DJI) lost a staggering 315.79 points, or 2.5%, and closed at 12,266. American Intl. Group, Inc. (AIG) led the losses in the Dow, falling 6.7%. The S&P 500 ($SPX) lost an even greater percent, dropping 2.7% on the day, or 37.05 points, to close at 1,330. The Nasdaq Composite ($COMPX) gave up 60.09 points, or 2.6%, on Friday. It closed at 2,271. Only about a half a dozen of the Nasdaq 100 closed in positive territory, with only a handful of the S&P 500 managing gains as well.

On the week as a whole, the Dow was down 0.9% (3% in Feb., and 7.5% ytd), the S&Ps lost 1.7% (3.5% in Feb., and 9.4% ytd), and the Nasdaq fell 1.4% (5% in Feb. and 14% ytd).

When the opening bell rang on Friday, the market was already priced lower with a larger-than-average gap. Most of the time gaps of this size will attempt to fill, but they tend to begin to do so within the first 15 minutes or so out of the open. On Friday, however, as the market went past the first 15 minutes of the day, it failed to hold the opening lows and attempt a break higher. Instead it moved to new intraday lows and then based along those lows past 10:00 am ET.

With the momentum bias favoring the bears, the market had very little chance of recovering its early losses. The market instead fell into a trading range when 10:45 am ET correction period hit. Originally I was expecting a wider range intraday with some better swings and then a breakdown into early this week to take the market back into previous daily lows from just over a week ago. Instead, the range remained very narrow and volume declined steadily throughout. This created a strong low-level base with a continued bearish bias into the afternoon.

The momentum shifted to lead into the breakdown at 13:30 pm ET by first coming into the lower end of the trend channel and then breaking through it after an early reaction to the 15-minute 20-period simple moving averages in the indices. Volume began to pick up at this time and within just a couple of minutes the market was breaking to new lows on the day.

The base on the 15-minute time frame created a short pattern that had high potential to trend throughout most of the remainder of the session. In the indices themselves though, this trend ended up being a rather choppy one. It did still hold the 5-minute 20 sma resistance, but a number of individual stocks within the indices themselves experienced much smoother breakdowns.

Heading into the new week, the market is still favoring the bears. The indices triggered 2 and 3 wave triangle breakdown patterns on the daily time frames late last week. The selloff on Friday was such a strong confirmation of that trigger in terms of momentum that it was able to continue into afterhours trading on Sunday. We still have not see the volume confirmation, but if the momentum can continue to hold strong on the downside this week, then we should see that confirmation accompany it with a spike in volume as support hits.

Before that move can happen, I would like to see some congestion form on the 60-minute time frame. This would allow for a bit of a build-up at this lower channel support on the daily time frame and compensate for the slower afternoon selling on Friday as compared to earlier in the day. This leaves me favoring a choppier start to the week with a bit of corrective action off the lows.

If the market slides lower with chop from one day to the next instead of increasing in momentum, then the odds will build for a stronger bounce into next month. The Nasdaq will have a relatively easy time breaking January's lows by at least a hair, but the Dow will find that zone to be very strong support and will have a more difficult time even testing it exactly before pulling up on the daily time frame again.

Dow Jones Industrial Average ($DJI)


S&P 500 ($SPX)


Nasdaq Composite ($COMPX)


Toni Hansen is President and Co-founder of the Bastiat Group, Inc., and runs the popular Trading From Main Street. She can be reached at Toni@tradingfrommainstreet.com.