The market ended in the red once again on Friday after a very strong week of selling. I was not quite sure what we would see when I wrote yesterday's column. We had seen two waves of downside on the 60-minute time frame which left the market correcting off lows on Thursday. How Friday would play out depended a great deal upon how the session began. Had the open been even or higher than Thursday's close, then we could have seen more rounded lows or a longer correction off the support in terms of time and price before more selling emerged. Instead, however, the bearish bias resumed around 3:00 am ET in premarket trading and accelerated into the opening bell.

Early in the day the National Association of Realtors reported that the inventory of unsold single-family homes and condos rose sharply by 10.5% to 4.55 million in April. This is the largest inventory since tracking combining single-family homes and condos began in 1999 and would take over 11 months to cover at the current sales pace. For single-family homes the data goes back further, but we are still seeing the largest inventory to sales ratio since 1985. As a result, the concern that we have not yet seen the lows of this housing market correction is now being fully appreciated by even some of the most optimistic observers and market participants. Weekly bear flags triggered this last week in both Lowes (LOW) (-0.68%) and Home Depot (HD) (-0.52%), both of which have been heavily impacted over the past 15 months by the declining turn-over in housing which inevitably fuels home improvement projects.

Dow Jones Industrial Average ($DJI)


The Nasdaq Composite ($COMPX), led by technology, has been displaying the greatest relative strength when compared to the S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) over the last several months since the market turned higher in March. It was able to recover the largest percentage of the losses that had accumulated since the market reversed off highs last year. This relative strength continued this past week as well. While the S&Ps and Dow gapped lower to immediately trigger a 60 minute bear flag, the Nasdaq held the trading range that had been forming into the close on Thursday when it opened the next day. It then held the lows of that range for the first hour of trade, whereas the S&Ps and Dow fell sharply lower only minutes out of the open.

The market found support at 10:00 ET when the Nasdaq hit the lower end of its 15 minute range. A bear flag formed at that point in the S&Ps and Dow on the 5 minute time frame while the Nasdaq also pulled higher at a more modest pace. When the Nasdaq closed its morning gap at the same time as it hit the 15 minute 20 sma, the indices gave way to another sharp move lower. This led to a breakdown trigger in the Nasdaq and continued the larger 60 minute bear flag in the other indices. When this took place I began to watch the move in comparison to the breakdown on Wednesday. Since the pace of the selling Friday morning was nearly as strong as the momentum seen in the selloff on the 21st it opened the door for the S&Ps to establish a move that was comparable in terms of price as well.

S&P 500 ($SPX)


The breakdowns in the Dow and Nasdaq were not quite as strong as the moves seen on Wednesday, so this made it a bit more difficult for them to create such a move. The Nasdaq, in fact, would first have to deal with equal move support as compared to the afternoon breakdown on Thursday. This support level hit at 11:30 ET when the S&Ps closed in on the zone of its 60 minute equal move. The S&Ps did fall a tiny bit short of an exact equal move, but the overall pace of the breakdown was slightly more gradual as well. The result was that it also held support when the other two indices began to bounce into noon.

A little two-wave move higher on the 5 minute time frame took the Nasdaq once again into its 15 minute 20 sma resistance. This triggered a scalp short in the indices due to the lighter volume on the upside and the slower overall momentum of that upside. I was not looking for much on this move, however, due to the larger time frames. Nevertheless, the indices still managed to retest the lows and even pushed the S&Ps closer into an exact equal move into 13:00 ET.

13:00 ET is a strong correction period intraday. Reversals from a morning trend often confirm at this time. The slightly lower low in the S&Ps, as well as the Dow, created a reversal pattern known as a 2B. It is a type of double bottom which involves a trap by breaking the prior lows by just enough to trigger many stop orders for those that bought the earlier lows. At the same time, it also traps those which take the break of the prior low as a new trigger to short.

Nasdaq Composite ($COMPX)


The momentum into the 13:00 ET correction period was rather strong. This made it difficult for the market to bounce quickly off the support. It took another flush lower into the 14:00 ET correction period to help the correction coming off lows. Since a three-day weekend was on the horizon I actually called it a day a few hours early in anticipation of a light and choppy afternoon. Due to the three wave downtrend on the 60 minute time frame and the support from that move hitting over noon, the holiday meant that the afternoon would most likely take the form of a range as well. The Nasdaq did have a bit of an uptrend, but it was still a very choppy and light one.

The Dow Jones Industrial Average closed lower by another 145.99 points, or 1.2% on Friday at 12,479. The loss for the week as a whole amounted to 3.9%. General Motors (GM) was the biggest loser on Friday. It fell 4.5% after announcing expectations of a $1.8 billion loss and cutbacks in production for the second quarter. Financials were also hit hard. Citibank (C) lost 2.76% and Bank of America (BAC) fell 2.3%. AIG lost 2.27%.

The S&P 500 fell 18.42 points on Friday, or 1.3%. It closed at 1,375 for a 3.5% loss on the week. Home builders were among its largest declining issues. KB Home (KBH) fell 4.6%, while D.R. Horton (DHI) shed 2.7%, and Pulte Homes (PHM) lost 2.2% on Friday. The airlines also faired quite poorly. The AMEX Airlines Index lost 4.25% on Friday.

The Nasdaq Composite took the lightest hit, losing 19.91 points, or 0.8%, on Friday and 3.3% on the week. It closed at 2,444. The Russell 2000 lost 1.22% on Friday.

The market will be due for a correction off daily and 60 minute support levels into early next week. The larger momentum shift on these time frames, however, leaves the larger bias on the bearish side. This means that corrections off support are going to have a slower overall pace on the upside. We can still see brief, yet rapid, upside moves on smaller time frames, but not on a 30-120 minute scale. I did a great deal of scanning this evening for larger time frame setups and there is a very strong bias in most of the stocks I flipped through for more downside on a weekly time frame.

A significant percentage of stocks have had two waves of upside off the support from several months ago and now have bear flags which have begun to trigger on the weekly charts. These two-wave breakdown setups can lead to longer ranges with the lower end of the channel serving as support and leading to a longer channel since corrective moves can often take one and a half to two times as long to form as the trend move going into those correction, but odds are high that they will at least test those channel lows and potential is strong to break them. There are also many that have had three waves within a longer congestion zone that also indicate a bear flag developing. Some stocks that fall into these patterns in recent weeks are M, XRX, BC, ATI, GNW, JCI, BAC, BBT, CTSH, VIA.B, TGT, BMS, AMP, KMB, SWK, BDK, DDR, MMM, FDO, CTSH, LINTA, and the list goes on.

This type of action that I am seeing over and over again leaves me looking for continuation patterns on the downside on a daily time frame over the next couple of weeks. Two weeks of choppy trade holding lows from Friday or early Monday with declining volume would be the best setup to see form on a daily time frame for that continuation breakdown.

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.