This past week was a momentous one for both earnings and other major news announcements. Heading into Monday I had been bearish, expecting selling to dominate the week, followed by a reversal higher into this week. It began by holding that bias with a sharp continuation lower almost from the start Monday morning. The session concluded with the Dow Jones Industrial Average ($DJI) off by 240 points, or 2.1%. The Dow ended the day at 11,131, just off the intraday low of 11125. This took its three-day loss to just over 500 points. In the Dow, only Alcoa (AA) posted gains, up 2.7% on news of up to an 8% buyout by Highfields Capital Management. The financials had weighed down the session, with Merrill Lynch (MER) coming in as one of the weakest of the group. The S&P 500 ($SPX) ended Monday lower by 23 points, or 1.9%, at 2,264. Meanwhile, the techs held down the Nasdaq Composite ($COMPX), which closed off by 46 points, or 2% at 1,803. Shares of Apple (AAPL) shed 4.8%, while Microsoft (MSFT) dropped 2.5%. Yahoo (YHOO) fell 4.8%, and Google (GOOG) lost 3%.

Oil, on the other hand, began to show signs of a developing recovery on the daily time frame. The pace of the selling, which had begun with sharp drop during Bush's address on the 15th of July, slowed in the prior week of trade and started to round off at support from May's levels. Although hesitant, crude oil closed higher last Monday by 1.2% at $124.73. It slipped lower again on Tuesday to close at $122.19, but the volume was light and this merely served to round off lows even better, allowing it to recover more rapidly on Wednesday. Crude closed at $126.77 a barrel on Wednesday, up 3.8%, when the technical reversal pattern was assisted by news that domestic gasoline supplies had fallen unexpectedly the week before.

Another development came on a political front which also could have influenced the move. Israeli Prime Minister Ehud Olmert announced that he would not be running for re-election in September, which opens the door for a more hawkish leader to come to the forefront of the Israeli political arena. Comments regarding Iran by Israeli Deputy Prime Minister Shaul Mofaz pushed crude past $128 a barrel for a weekly high on Friday, but it failed to hold the gains and closed at $125.10.

While oil played a game of cat and mouse throughout the week, ending the session on Friday not far from where it began on Monday, so too did the rest of the market. Shares recovered to a greater extent on Tuesday that I had expected would occur going into the week. The financials were largely responsible. Merrill Lynch (MER) managed to recover from a nearly 10% morning loss to close higher by 7.9% after it announced that it would raise $8.5 billion in stock sale and sell off some of its hard-hit mortgage securities. Bank of America (BAC) gained 14.8% on Tuesday, adding 34 points to the Dow, which closed higher by 266 points total, or 2.4%. The rally continued into Wednesday with energy stocks taking over from the financials to lead the Dow and S&P. The Dow added another 186 points, or 1.6%, but the Nasdaq only managed to tack on an additional 0.4% to its 2.5% gain from Tuesday.

Dow Jones Industrial Average ($DJI)


The market succeeded to establish a slightly higher high into Thursday morning as compared to Wednesday morning and this created the beginning of what would become a 2T reversal setup on a 60-minute time frame. A 2T is a form of double top where a slightly higher high creates a type of bull trap. Since the momentum was strong into the second high, however, the reversal was not a rapid one to begin with. Instead, the pace of the price action needed to shift in order to bring on the start of a stronger break lower. This took place on Thursday from the late morning throughout most of the afternoon. After a brief, yet rapid, pullback into noon, the market began a slower recovery higher on light volume. The gradual pace of the buying, accompanied by a lack of strong participation, were the two strongest elements contributing to a late day breakdown in the indices. This breakdown pattern, which was an Avalanche break out of a 60-minute head and shoulders pattern in the Dow and S&Ps, continued sharply lower into Friday morning.

Poor economic data, which had also been plaguing the week of trade, provided a negative influence on the market on Friday as well. Nonfarm payrolls dropped another 51,000 in July, for the seventh straight month of losses amounting to approximately 463,000 jobs, while the unemployment rate jumped to a four-year high of 5.7%. Economists had expected a rise to 5.6% from 5.5% in June. The selling continued after the Institute of Supply Management data came out at 10:00 ET. Although up slightly from the month before, the ISM manufacturing index came in at 50, failing to break the 50 mark, which would indicate expansion. Instead, the it showed that the higher costs and mixed demand have kept levels flat for the past month.

S&P 500 ($SPX)


The extreme selloff on Friday morning left the market uncertain what to do for the remainder of the week. The downside was exhausted on the smaller intraday time frames, but the bulls were not ready to jump back in on the heels of one of the most volatile weeks of trading year-to-date. The Dow Jones Industrial Average ended the week lower by 0.5% at 11,326.32. General Motors (GM) was among the biggest losers on Friday, falling 7.6% after it posted a $15.5 billion loss. The S&P 500 eked out a gain for the week by 0.2% and closed at 1,260.31. The Nasdaq Composite ended flat on the week at 2,310.

Nasdaq Composite ($COMPX)


July began with a build-up of volume as the market continued its weekly selloff. This created an exhaustion move on the larger weekly time frame which has led to the correction attempt off lows that has taken place over the past several weeks. Although it has not materialized quite as I had hoped by forming a little more downside earlier this past week, the market still has room on the larger time frames to continue to hold the weekly exhaustion and support and head higher into the new month. I am expecting a choppy start to the month, but if the chop shift momentum slightly on some downside congestion, then the indices can pop higher more quickly. Otherwise, continued chop as the market makes its way higher is more likely.

I have sketched out several scenarios on the weekly charts of the DIA and QQQQ to show how the momentum coming off the weekly lows will most likely impact upcoming price action. The thick blue line represents the move lower in June and into early July, while the thinner blue lines represent the waves of action coming off the lows and how the pace of those moves will typically need to shift in order to see any stronger upside price action. The dark red trend line and the 50-period simple moving averages will be the strongest resistance levels. The moving average is also displayed in dark red and is currently corresponding to the trend line in the SPY. Despite the congestion at lows Friday, my bias into the new week is also higher on the 60-minute time frame, since the correction from an extreme move lower can build on itself and easily gain momentum on the upside once the upper channel line from the congestion off the lows breaks.

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.