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Tumultuous Stock Market Session Completes the Week
By Toni Hansen | Published  03/17/2008 | Stocks , Futures | Unrated
Tumultuous Stock Market Session Completes the Week

Good day! Well... perhaps not for everyone given the latest shakeup in the marketplace, but it has at least been eventful! It is markets like these that can make or break a trader or investor. Bear Stearns (BSC), a name that has been a cornerstone in the financial world for nearly a century, turned up the heat on Friday when it announced that its ability to support itself was in dire jeopardy. It had little choice other than to accept a bailout package from the Federal Reserve and J.P. Morgan Chase, which did little to provide much sought-after reassurance.

The indices went into free fall mode within 15 minutes of the opening bell, not stopping until they had hit Thursday's lows at about 10:00 am ET. Although the market held true to the bias we had been looking at going into the day, whereby it favored a larger range within the zone of Thursday's trade, it was not at all a pretty picture. The market bounced well off the lows, but held the middle price levels of the descent and began to correct through a larger trading range into mid-day.

Volume dropped off as market players digested the morning's move and considered whhich course of action would be the most prudent. When one of the big boys like Bear Stearns is vocalizing its worries, particularly after earlier reassurances aimed to ease investor concerns, then all is most certainly not well. Just how unwell "unwell" meant did not make itself known until Sunday evening, but I shall get to that a bit later.

As the market corrected into the second half of the day's trade on Friday, a narrowing channel formed by way of a symmetrical triangle. Upside moves became more and more stunted as the range progressed, creating a bearish bias into the early afternoon. Due to the morning's price action, however, downside was somewhat limited. In order to continue a move of that magnitude on a second wave of selling, the market will tend to have a longer relative correction from the descent than it would a normal selloff. The early afternoon breakdown, for instance, would have retraced back to the middle of the triangle, or even the upper end of it before it would break sharply lower on a continuation.

When Friday's breakdown took place into 12:30 ET, the volume was still on the light side and the momentum was not very strong. This created favor for a bounce before it would continue. Instead of pulling all the way back up to within the range, however, the market only tested 5-minute 20 simple moving average resistance level and stayed in the lower segment of the earlier triangle. While volume was lighter on this upside than on the downside and the momentum was gradual, favoring a break lower, this also meant that the break would not be nearly as extreme as the morning move and that the zone of morning lows would remain a key support level.

The market managed a decent recovery into the final 90 minutes of trade on Friday, coming off that second afternoon continuation on the 5-minute by pulling up to the 5-minute 20 sma. It rested there for about half an hour, and then broke strongly higher shortly after 15:00 ET. This move took the indices back to the upper end of the morning range, as well as 5- and 15-minute 200-period simple moving average resistance zones. A retracement back to the 5-minute 20 sma held with the market closing down 194.65 points in the Dow (-1.6%), 27.34 points in the S&P 500 (-2.1%), and 51.12 points in the Nasdaq Composite (-2.3%).

Bear Stearns (BSC) fell 47% on Friday, but other financials were also badly hit. Citigoup (C) dropped 6.1%, American Express fell 4%, J.P. Morgan lost 4.1%, Goldman Sachs lost 5.2%, and Morgan Stanley shed 4.9%. To magnify the situation, on Sunday Bear Stearns made the shocking announcement that it was working on a buyout by J.P. Morgan Chase & Co. for a mere $2/share. The Fed stepped in to try to cushion the blow by cutting interest rates another 25 basis points just two days prior to an anticipated 75 basis point rate cut most had been expecting coming out of Tuesday's meeting. Although the index futures had been trading higher on Sunday, they again plummeted Sunday evening on the heels of BSC's news. The next major support zone in the market is going to be the 2006 lows in the S&P 500.

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.