Friday's Crash Catches Us Offguard

The markets opened fairly flat on Friday, then proceeded to collapse as the biggest crash bar since last summer formed on the daily charts. Some are arguing that Friday can be attributed to expiration games by those who had been selling $41 call options on the QQQQ. Since the NASDAQ 100 was hardest hit we will say it is an interesting theory. However, Friday's crash puts a huge monkey wrench into our overall analysis as it calls into question the viability of the breakout, which occurred in November. Subscribers may recall that on October 19 the market experienced a high volume reversal day, which we determined at the time to be a strong confirmation of support. From that point the market has experienced a strong rally. Friday's high volume reversal day must then be taken seriously as it could be marketing a line of overhead resistance. Does this mean that we are heading into a bear market? Not at all. What it means is that unless we see an equally strong reverse of Friday's sell off this week that we will need to be using the oversold bounces to sell into. The immediate trend remains down after Friday and until that trend reverses, long positions are going to struggle. How this all fits into the longer term outlook of the market, we just don't know right now. Today we expect to see at least a partial bounce. This bounce should be played only by the most aggressive market participants, or day traders. The picture is murky after such a poor day on Friday and it is best to take a step back and wait for more information before making any decisions.