The market had a rough session on Friday. The weakness we were watching for heading into the open was strong enough that the indices were quickly trading under Thursday's lows. The inability to show any strength out of the open when these previous lows hit soon led to panic. By the 9:45 ET reversal period the market was breaking the opening lows and gaining momentum on the downside. This wiped out any chance the market had at making new highs on the last daily upside move. This selling continued to gain pace until the Dow Jones Ind. Ave. ($DJI) hit its 15 minute 200 simple moving average. The Dow, as well as the Nasdaq Composite and S&P 500 all came into congestion from Wednesday on this drop and it stalled the decline temporarily.



Unlike the previous several days of trading, the market reacted very little to the support levels throughout the entire morning on Friday. They barely retraced in terms of price and instead just fell into sideways congestion. At about 10:00 ET the selling resumed, but it was a bit early for a decent 5 minute breakdown, so the 10:45 ET correction period held and pushed the market into a longer congestion zone until about 11:15 ET when the 5 minute 20 sma zone held and led to another larger breakdown. This second move within the congestion itself allowed the market to gear up for a more decent decline. This type two-wave correction or congestion is actually what I like to look for to lead to some of the best continuation moves.



The second move on the 15 minute charts continued steadily lower throughout the morning and into 12:00 ET, which is a huge correction time when the market has been in a trend all morning. This decline came up a bit short in terms of the 15 minute 200 sma in the Nasdaq. In order to turn around into the afternoon the market increased its pace on a bounce into the 5 minute 20 sma at 12:30 ET and then had another decline and flush on somewhat lighter volume than on the 12:00 move going into 13:00 ET. This led to a better test of the 15 minute 200 sma in the Nasdaq and a test of the 20 and 50 day simple moving averages in the Dow. It resulted in a nice 2B type of setup whereby the indices established a very slightly lower low to create a trap type of double bottom.

Since the move into 13:00 ET was not a lot slower than the first drop into 12:00 ET, however, the afternoon bounce was a choppier one with more overlap from bar to bar on the 15 minute time frame, even though the overall pace was similar on that time frame as compared to the second morning decline. This similar momentum meant that the start of that previous drop would serve as strong resistance. It hit right at the end of a three-wave uptrend move on the 1-5 minute time frames. The smaller trend completion and the corresponding resistance served as a nice trigger for another reversal into the final 90 minutes of trading.



Friday ended with a loss of nearly 150 points in the Dow, about 19 points in the S&P 500 ($SPX), and just over 32 points in the Nasdaq Composite ($COMPX). Weighing heavily in the minds of many market players lately has been the plethora of negative news surrounding subprime mortgages. Citigroup (C) joined the fray on Friday when it warned that it could be stuck holding leveraged loans for corporate buyouts when it failed to sell debt to investors on four separate occasions last quarter, which means that it has taken a hit in revenues as a result. Shares of Citigroup fell 0.8% on Friday despite a positive open. Meanwhile, Bank of America (BAC) fell 1.9%, J.P. Morgan (JPM) slid another 2.2%, and Wachovia Bank (WB), which beat earnings estimates, dropped a whopping 3.2%. Other financial-related stocks, such as Merrill Lynch & Co (MER) (-3.2%) and Goldman Sachs Group (GS) (-2.7%) also were very hard-hit and topped the NYSE losers list on Friday.

Another stock to take a big hit on Friday was Caterpillar Inc. (CAT). It opened with a very extreme downside gap of nearly 6.8% after announcing a 21% decline in profits. The gap was so steep that it opened into the 50 day simple moving average and price support from congestion a few weeks earlier. The reaction to this support was enough that CAT recouped some of its losses to end -4.3% off Thursday's close.

Google Inc. (GOOG) experienced a similar loss when it opened on Friday. It posted a quarterly growth in profits of 28%, but this came in short of Wall Street's expectations and it also opened with an extreme downside move of nearly 6.7%, which was smack into its own 50 day sma and congestion from June's mid-month prices. It also pulled up a bit intraday off the support though, and ended the session down 5.2% off Thursday's close.

For anyone heading to Europe from the States any time soon, the bad news continues... As I talked about earlier in the week, the dollar again fell to new record lows against the euro on Friday. As of 9:30 pm ET, Sunday, the euro is at about $1.38.

Not all sectors succumbed to the larger market decline. Hardware stocks, multimedia, and internet stocks managed to post gains overall. Gold, silver, and oil services were also able to at least hold up overall. The top NYSE gainers included SLB, FCX, WDC, WSM, COF, WFT, BA, GSF, KCI, and TPX. In the Nasdaq the gainers were AAPL (yet again!), SNDK (which did give in to selling after a sharp upside open), ISRG, APOL, OMCL, and NWRE (which shot higher into positive territory in the afternoon), ATMI, FOXH, and one of my favorites in recent months: RVBD.

I am expecting this coming week to have more of these choppy days of trading but with an overall downside bias. The 50 day simple moving averages in the Dow and Nasdaq are my target zones on this correction, although the Nasdaq will have to increase its downside momentum quite a bit to make it back into that support level which was last hit in late June.

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.