(Note: Unless otherwise stated, the index action described below relates to the EMini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.)

The S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) both fell 0.7% last week. The S&Ps closed on Friday at 1,282.84, while the Dow closed at 11,543.55. The Nasdaq Composite ($COMPX) faired worse, losing 2% to end the week at 2,367.52. Action in recent weeks has been marked by steady rallies followed by sharp selloffs. One such rally had taken place ahead of Monday's open, but the indices had been rolling over at highs on Friday and gapped strongly lower Monday morning. Strong downside action continued to drag the market lower into Tuesday, but the pace rolled over at lows and another intraday recovery began.

The market turned back around mid-week, pushing higher once again. The indices held the daily correction off resistance which we have been following over the last several weeks since the indices first ran into the daily and weekly resistance zone between August 11-15. The S&Ps and Dow attempted to push through it on Thursday when the latest rally took place on a 60-minute time frame, but volume was light on the attempt and the Nasdaq failed to break through its own upper trend channel resistance. Failing to confirm the breakout attempt, the indices fell back sharply on Friday, kicking off once again with a strong gap lower.

This break lower on Friday marks the third move on the downside on a 60-minute time frame in the Nasdaq Composite. Since each push lower has created a very slightly lower low, it is possible that a momentum reversal pattern can form, resulting in a break higher late Tuesday or into Wednesday. If the lower end of the channel breaks, along with the 50-day simple moving average, however, then the upside moves since August 21 would then be viewed as just two waves of a correction from the move lower which began on the 15th and the Nasdaq, along with the S&Ps and Dow, could then break lower for a move equal to the initial drop off August highs into the lows of the 21 of August. Such a break would take the market to at least the lows from July 28 in the S&Ps and Dow and August 4 in the Nasdaq.

Nasdaq Composite ($COMPX)


On a weekly time frame not much has changed as far as the market's bias since last week. The Nasdaq is continuing to form a potential cup-with-handle, while the indices are continuing to show a strong inclination to continue to hold the previous weekly lows from early July for about two more months. A good example of how the current market action on a weekly time frame can play out is to compare the weekly charts of the S&Ps and Dow to the current 60-minute chart of the Nasdaq. The highs in September/October on the S&Ps and Dow would be the pattern equivalent of the highs from the 15th on the Nasdaq, while the correction off lows earlier this year into May would be comparable to the bounce from Aug. 21-22 in the Nasdaq on the 60-minute. The current weekly chart would thus be similar to the the action 26th, which peaked on the 28th. Should this current weekly action continue play out like it did on the 60-minute, then we can expect another break lower in the fall.

Despite weekly losses, the market still managed to close higher on the month. The S&P 500 gained 1.2%, while the Dow Jones Ind. Ave. added 1.5%, and the Nasdaq Composite climbed 1.8%.

Dow Jones Industrial Average ($DJI)


In other markets, the euro and dollar are also continuing to follow through as expected in that they have both held their respective resistance and support levels on a weekly time frame and congested. As I stated before, however, both can push these levels a bit further still before a larger price correction takes place. This means room for slightly higher highs on a daily chart of the dollar and slightly lower lows for the euro on that same time frame. If this momentum shift continues to form in that manner, then each currency can easily reverse sharply in the fall as well. The dollar would pull back quickly, while the euro jumped once again. The extent of these moves, however, is going to depend upon how strongly the pace of the price action shifts. A more gradual move higher at this point, followed by a sharp pullback off the highs in the dollar, for instance, can more easily create an Avalanche continuation pattern that would then lead to a second wave of strong selling that would likely be larger than the first later on in the year or into early next year. Vice versa for the euro.

S&P 500 ($SPX)


Oil is another market that is constantly in the headlines. It has also hit a larger support level, like the euro, in recent weeks. It has weaker support, however, than the euro and I can more easily see it having a stronger break lower within the next few weeks. The next support level in oil is March's congestion, which will be about the 50-week sma, followed by the largest congestion from late last year into February of this year. This is about $90-$100 a barrel.

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.