Dow Sets Records with Losses Topping 777 Points

Dow Sets Records with Losses Topping 777 Points

(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 market was on pins and needles throughout Monday's session. The morning began with an extreme gap on the downside. Over the weekend I showed you the strategy to employ in the case of such gaps and it worked quite well. Initially I had been leaning more towards a large gap lower and then upside in the afternoon before the two-wave pattern short we have been following over the past several days could offer a trigger. The market had other things in mind however. The Sunday and early Monday morning premarket selling continued right into the opening bell when the indices broke sharply to the downside following a long premarket base at lows that had been forming since 4:00 am ET.

Due to the gap, as soon as the 15 minute lows broke, it triggered the gap pattern I laid out yesterday for a short to continue the move in the direction of the gap as opposed to an attempt to close the gap. This break also meant the trigger on two-wave short on both the S&P 500 and Nasdaq Composite on a 60-minute time frame. The Dow Jones Industrial Average had held up more favorably and its morning downside still placed it within the channel of the two-wave formation. It would not be until the government's rescue plan began to unravel later in the session that the Dow was able to follow the lead of the two weaker indices.

Nasdaq Composite ($COMPX)


Although the market was able to sell off sharply out of the open, the move exhausted itself relatively early on as well since an average day's range was established within the first 30 minutes of the trade. Technology shares bore the brunt of the morning's decline. Morgan Stanley cut Apple (AAPL) from "overweight" to "equal weight" in anticipation of the effects of slowing demand. AAPL closed lower by 17.9% with its largest percentage decline since July 2001. Meanwhile, Qualcomm (QCOM) fell 13% and Google (GOOG) lost 11.6%, breaking the $400/share level.

Dow Jones Industrial Average ($DJI)


When the 10:15 ET correction period hit, the market began to pull higher, but the move did not get far. The indices fell into a trading range as market participants awaited the results of a vote on the proposed $700 billion deal aimed at stabilizing the financial sector and the economy as a whole. Well, much to the shock of Wall Street, the House of Representatives voted against the deal. 205 voted in favor of the "bail-out" package, while 228 voted against. Among Democrats 140 voted in favor, while 95 were against it. Among Republicans, 65 voted in favor, while 133 voted against.

The blow was felt immediately by the market as prices plunged. Despite the shock, the market traded incredibly well from a technical standpoint. Price action for the remainder of the day was nearly textbook. The indices recovered from their immediate collapse, but the congestion level that had been in place before the news served as a strong resistance level. Many had hoped that a new vote would be forthcoming, however, as the afternoon wore on it became more apparent that this would not happen on Monday at least.

The market consolidated in a narrowing range into the middle of the afternoon. the 5 minute 20 sma served as resistance and the channel break lower into the final hour of trade. Prices slid back into lows before popping into the final 30 minutes of the day to extend the congestion into the close, leaving it favoring another break lower in afterhours trade.

S&P 500 ($SPX)


By the time the dust had settled on Monday, the Dow Jones Industrial Average ($DJI) closed lower on the day by 777.68 points, or 7%, at 10,365.45. Every single one of Dow's 30 components was in the red. Both Bank of America (BAC) and American Express (AXP) fell 17.6%. The S&P 500 ($SPX) fell 106.85 points, or 8.8%, and closed at 1,106.42. The Nasdaq Composite ($COMPX) lost 199.61 points, or 9.1%, and ended the session at 1,983.73.

Although volatility will remain high on Tuesday as the markets continue to ponder over a new plan from Congress, we should not experience as strong of a price decline. There is still a bit of room to move on the downside before a daily equal move hits, but it is not much. I would again like to urge extreme caution in Tuesday's trade. It is great to see "orderly conduct" by the market even in the midst of a loss of nearly 800 points in a single day, but don't take it for granted!