The indices were hugging their 15-minute 20-period simple moving averages heading into the open on Thursday. This congestion had formed throughout the second half of the day on Wednesday and it created a bearish bias going into Thursday morning on a 15-minute time frame. As I mentioned in yesterday's column, if the breakdown from this pattern followed through gradually, it would have created a bullish pattern to push the indices into larger daily resistance from about a month ago before creating the daily pullback off resistance. The breakdown, however, ended up being stronger than the decline late Wednesday morning in both the S&P 500 EMini futures contract (ES) and the mini-sized Dow futures (YM). Although the Nasdaq EMini (NQ) was more gradual overall, the rest of the market weighed heavily upon it and the market failed to create a two-wave pullback buy setup on a 15-minute time frame.

The economic data which came out on Thursday was not very favorable. The biggest of these was the 10:00 ET existing home sales data. The market had triggered the 15-minute short setup shortly after open. These losses deepened, however, when the National Association of Realtors reported that resales of U.S. single-family homes and condos fell 2.6% in June. This brought it to a seasonally adjusted annual rate of 4.86 million, which is the lowest level in about 10 years. Resales are now down 15.5% over the past year and down 33% since they peaked in 2005. Sales of single-family homes fell 3.2%, while sales of condos rose 1.7%.

In a separate report, the Census Bureau stated that about 25% of housing units available for rent that were built in the last decade are vacant, while about 10% of homes are. The median sales price fell 6.1% in the past year to $215,1000 while the inventory of unsold homes on the market rose 0.2% to 4.49 million. This is an 11.1-month supply at the current sales pace and is the second-highest inventory level since the 1980s. About 1/3 of current sales are distressed sales, meaning that they are either foreclosures or short sales.

The House approved legislation on Wednesday aimed at assisting the flailing housing market. It includes support for Fannie Mae (FNM) (-19.9%) and Freddie Mac (FRE) (18.4%), assistance for homeowners needing to refinance high-interest loans, and a $7,500 tax credit for first-time home buyers. FNM and FRE had opened higher on the session, but then trended lower following the 10:00 ET data throughout the remainder of the day and ended up being the third and fourth worst performers in the S&P 500 ($SPX).

Dow Jones Industrial Average ($DJI)


The selloff in the indices which took place immediately after the housing data found support by the 10:15 ET correction period. They then fell into a low-level base as volume dropped off into 11:00 ET. This created a strong short setup leading to new lows into 11:30 ET. The Nasdaq EMini (NQ) hit support at Wednesday's afternoon lows at this point, while the S&P 500 (ES) hit support from Tuesday's mid-day highs. This pushed the market into another correction over noon. The Nasdaq continued to show the greatest relative strength, but the S&Ps and Dow paced lower.

The 5-minute 20-period simple moving average served as resistance throughout the entire session in both the S&Ps and Dow, although the extent of the selling declined mid-day. The market then broke sharply lower again, however, coming out of 14:00 ET when that correction period hit. A final bear flag developed into the last hour of the day with the Nasdaq finally joining the S&Ps and Dow. All three of the indices closed at the zone of the day's lows.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) fell 283 points, or 2.4%, on Thursday and closed at 11,349. 26 of the Dow's 30 industry components finished the day in the red. General Motors (GM) fell 11.1%, while Boeing (BA) shed 6.3%. The five financial stocks in the Dow, however, accounted for more than 1/3 of the Dow's decline (108 points). These were American International Group (AIG), American Express (AXP), Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM).

The S&P 500 ($SPX) dropped 29.65 points, or 2.3%, and closed at 1,252. As you have probably guessed, the financial sector fronted the losses. It was down 7%, while consumer discretionary followed with a 4% loss. Information technology dropped 3%.

The Nasdaq Composite ($COMPX) lost 45.77 points, or 2%, and closed at 2,280. Share of Qualcomm (QCOM) took off after settling a patent and royalties dispute with Nokia (NOK). QCOM gained 17%, while NOK rose 2.2%. Amazon was up 11.6% after it reported better-than-expected earnings for the second quarter. Among the top losers in the Nasdaq were Sirius Satellite Radio (SIRI) (-9.7%), Broadcom Corp. (BRCM) (-9.65%), Wynn Resorts (WYNN) (-8.24%), and Sandisk Corp. (SNDK) (-7.21%).

Nasdaq Composite ($COMPX)


Thursday's session ended at support in the indices from the end of last week and the beginning of this at prior highs and congestion zones. This creates higher potential for a bounce in the morning. On the whole though, I am favoring further downside into next week for that larger daily flush lower that we had been looking at forming going into this week. The S&Ps and Dow can both easily drop back into the zone of the month's lows before they are able to bounce back again.

NOTE: I will be in Iowa retrieving my kids from a month at the grandparents next week, so the Daily Market Action Letter will not be sent out next week. It will resume on Monday, August 4.

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.