Throughout most of this past week I had been watching for the market to attempt a larger correction following the momentum shift which took place the week before. The market failed to offer any confirmation throughout the week, however, via a change in momentum on a 30 minute time frame and remained under heavy pressure into the end of the week. We are still at the same zone of support which hit two weeks ago and slowed the rapid descent in the overall market. Despite slightly lower lows, the support has yet to fail. The market ended the week on the rough side though.

Premarket data had no effect on the market. The Labor Department reported that the prices of imported goods rose 2.6% in June. Excluding fuel, import prices rose 0.8%. Imported petroleum rose 7.4%, for a 78.6% gain since last June. In a related report, the Commerce Department announced that exports increased much faster in May than imports. This created a drop in the U.S.'s trade deficit that caught many by surprise. The seasonally adjusted trade gap came in at $59.8 billion in May.

Dow Jones Industrial Average ($DJI)


Friday began with a modest gap lower in the indices. Steady selling in premarket trade was followed by an open that placed the indices under 5 minute 20 period simple moving average resistance and the prior 5 minute lows of Thursday afternoon. The selling continued immediately out of the open, but lasted only briefly. By the time the first reversal period hit at 9:45 ET the indices were rounding off a bit and then began a steady climb back into the 5 minute 20 sma resistance.

The 5 minute 20 period simple moving averages hit at the same time as the 10:00 ET Reuters/University of Michigan Sentiment Index was released. July's preliminary consumer sentiment index rose to 56.6 from a final reading in June of 56.5. June's final reading had been expected to come in at 55.5. The survey is based upon questions posed to 500 households regarding their attitudes about the economy and is directly related to the strength of consumer spending. One-year inflation expectations rose 0.2% to 5.3%.

S&P 500 ($SPX)


The pace of the price action in the market along the resistance soon rolled over with the help of a statement by Treasury Secretary Paulson on the status of Fannie Mae (FNM) and Freddie Mac FRE). An announcement to the tune of a bailout plan was way-laid when Paulson announced that the Bush Administration supported FNM and FRE "in their current form." The market reversed on this statement with a rapid move back to the lower end of the range out of the 10:15 ET correction period.

The Nasdaq Composite ($COMPX) held the previous lows perfectly. Although the S&P 500 and Dow Jones Industrial Average Index futures hit very slightly lower lows into 10:30 ET, the zone of the morning lows held and the indices were pushed into a minor correction up off the lows into the 5 minute 20 sma once again. This hit at the same time as the 11:00 ET correction period and the market again turned lower. This time all three of the indices broke to new lows.

A final bear flag developed from 11:30 ET into noon. At 12:00 ET the indices began to slide lower, but the momentum in the S&Ps and Dow was more gradual than each of the previous moves. This shift in the pace of the price action began to change the larger market bias in favor of a rally in the second half of the session. The last segment of the morning's downtrend channel broke coming out of the 13:00 ET correction period, so the time zone along with the pace of the price action supported the reversal.

Although the momentum increased somewhat on the upside as the indices pulled higher, it was not substantially sharper than the prior drop. The previous 5 minute highs held well as price resistance when the 15 minute 20 sma hit. The large level of overlap in price from one bar to the next on the 5 minute time frame allowed the market to flush quickly lower out of the 14:00 ET correction period. The larger reversal held, however, and at 14:30 ET the indices broke strongly higher.

Nasdaq Composite ($COMPX)


At 2:30 ET news out of Reuters suggested that the Fed had agreed to let Fannie Mae (FNM) and Freddie Mac (FRE) use its emergency discount window to assist in the short-term with its cash crunch. Within a few minutes all three of the major indices were back to the 5 minute 200 sma resistance and shortly thereafter they were back to testing 15 minute highs from Thursday afternoon to place them in positive territory, albeit only for a minute. This larger level resistance zone corresponded to the 15:00 ET correction period and the market pulled back throughout much of the final hour to reclaim a large chunk of the afternoon recovery. A lack of confirmation of the Fed support also had created doubt. This was confirmed following the close when a Fed official told both Reuters and the Dow Jones that no such discussions had taken place. Fannie Mae (FNM) lost 23.5% on Friday while Freddie Mac (FRE) fell another 3.1%. Both had been in significantly more dire territory at the opening bell with FRE down over 50% within the first few minutes of trade and FNM nearly down the same.

After falling below the 11,000 level for the first time since August 2006, the Dow Jones Industrial Average ($DJI) closed lower by 128.48 points, or 1.1%, at 11,100.54. 21 of the Dow's 30 components lost ground with Chevron Corp. (CVX) leading the way. It fell 4.2%. Boeing (BA) came in a close second with a loss of 4.1%, while J.P. Morgan Chase (JPM) fell 3.9%. General Motors (GM) was up 2.4%, along with Caterpillar Inc. (CAT), which rose 2%.

The S&P 500 ($SPX) slipped 13.9 points, or 1.1% as well, on Friday to close at 1,239.5. For the week as a whole the index closed lower by 1.8%. Each of the S&Ps 10 industry groups finished the session on Friday in negative territory with the losses fronted by the financials. They fell 2.5%.

The Nasdaq Composite Index ($COMPX) did not fair quite as badly as the other two on Friday. It closed lower by 18.77 points, or 0.8%, at 2,239.08. Its weekly loss came to just 0.3%.

Crude oil prices once again grabbed the headlines on Friday with yet another record high. Late Thursday afternoon prices had spiked more than $5 a barrel on news that Iran had fired a test missile in the Persian Gulf. In other oil-related news, the Movement for the Emancipation of the Niger Delta announced an end to its cease-fire on Nigerian oil facilities and Brazilian oil workers made known their plans to stage a five-day strike at some of Petroleo Brasileiro's (PBR) offshore oil platforms. Crude closed at $145.08 on Friday, up 2.4% over the previous day, after hitting a record intraday high of $147.22 a barrel. Crude thus far this year is up 51%.

This next week brings with it the very start of earnings season. Merrill Lynch (MER) and Citigroup (C) are both expected to announce second-quarter results. I may sound like a bit of a broken record here, but I remain optimistic that we will see a greater correction off the daily support levels that have hit over the past two weeks. While we have yet to see any confirmation, the larger momentum in the market continues to shift following strong downside several weeks ago. This can be followed by flush, which is what took place on Thursday and into Friday, before a correction takes hold, but I remain more willing to commit to over night holds on the upside that outperform at this time than on the downside.

I had a question in a webinar I did earlier this past week regarding how I deal with the bias I have heading into the day and whether or not I am willing to trade against it. It is very important to note that I do not let my bias heading into the day serve as my final thought. A key factor in any trader and investor's success is their ability to admit when conditions prove them wrong, or at least fail to prove them correct. This is typically apparent by monitoring the shifting pace of intraday price action.

In order to confirm the upside bias I've had at this support zone we needed both a sharp upside move followed by a more gradual downside move leading to a break higher out of the trend channel. While we've had the sharp upside moves, the remaining confirmation has been lacking.

Biases serve as a very good tool to help keep you on track throughout the trading day, but if the "if this"es "then that"s do not continue to line up as you expect to confirm your initial bias, then being a chameleon is necessary for your survival. Every action in the market can have a number of outcomes. There is always the "most likely" scenario, and then there are the scenarios for when the pace needed for the "most likely" scenario does not play out. Although the momentum shift we have been expecting two weeks ago did develop, the outcome of the shift is still at large.

The action we have currently at hand suggests a "most likely" scenario that the breakdown on Wednesday that continued into Friday was a flush of the larger pattern. To confirm this bias now what we will need is a rapid reversal higher. This began on Friday afternoon with the 2:30 ET rally, but it would need to continue into Monday morning and make it back to the highs from the past Wednesday by Tuesday morning. It this occurs, then the market has a very high probability of continuing higher for several weeks, but without this immediate confirmation we will then run the greater risk of another strong breakdown on a daily time frame, which would likely take the Nasdaq back into support from the congestion of the lows made earlier this year.

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.