On Friday, the Nasdaq big caps reset for the third time in three months with a 228 point intraday drop.

After failing to decline on all kinds of news headlines over the last four weeks, a confluence of events combined to trigger the mini flash crash. On a normally low volume Friday the computers driving the market managed to trigger some sell stops and the Nasdaq big caps began to cascade lower. The selling event hit an air pocket at about 2:50 and the ensuing drop to the lows of the day short-circuited the decline.

Amazon dropped from $980 to $927 in less than a minute on volume of 300,000 shares and the bid ask spreads blew apart. Nearly $290 million in Amazon shares traded in less than a minute.

The Nasdaq QQQ ETF traded five times its normal volume and 3.5 million shares traded in one 3-minute period at 2:50. This was the selling climax for the move. Another 20 million shares traded in the last 18 minutes of the session with most of the volume to the upside.

The question now is what will happen on Monday? In theory, there should be some follow on selling at the open as margin calls are covered. In the prior two resets on March 21st and May 17th, the following morning saw a lower low and then traders bought the dip. I seriously doubt we will see a lower low on Monday because the -143 point close was a large bounce off the -228 point intraday low. If this is just a "normal" one-day reset, I would be surprised to see another break below 5,700 on the NDX.

However, we have not had a material bout of real profit taking since before the election. By material, I mean a 5% to 7% 3-5 day decline. We are overdue since we normally have 2-3 per year and it has been 8 months.

We will not know which flavor we are going to get until afternoon on Monday. If any opening rebound is sold after lunch then all bets are off and we could be looking for a multiday event. However, if the NDX moves well over the 5,750 level on decent volume in the afternoon, then Friday was probably a one-day wonder.

The S&P traded in a 31-point range and closed exactly in the middle with only a 2 point loss. That was as neutral as you can get. Sellers appeared early, buyers jumped in on the dip and the index traded to a stalemate. Resistance remains 2,440 and support 2,420.

The Dow shook off the intraday weakness to overcome large losses in Apple and Microsoft and still made a strong new high. This is bullish for the broader market. The Dow rallied on strength in the banks and the energy sector. As long as the Dow remains over 21,130, the rally is intact.

The Russell 2000 had a good day and closed at a new high thanks to the financial stocks, which make up 27% of the index components. The strength in the banks was due to sector rotation and the expectations for a Fed rate hike on Wednesday.

Earnings for the week are lackluster unless you are excited by companies like H&R Block and Kroger. The Q1 earnings cycle is over.

The economic calendar is headlined by the Fed rate decision and Yellen press conference on Wednesday. There is almost no chance the Fed will not hike rates. The only unknown is whether they announce some action on reducing their balance sheet. That is the wild card for the market but I am not sure it would make any difference.

I always warn that the events that cause the most market damage are the ones that are the least expected. Nobody expected Goldman and Bank America to warn about valuations on big cap tech stocks on the same day that Citron Research issued a short call on Nvidia as being grossly overvalued. The market may have been looking for a reason to take profits and that confluence of events gave portfolio managers an excuse.

The S&P futures are down -4 on Sunday evening with a lot of darkness left before morning. Anything is possible. Please don't jump into any new trades until the market is rebounding. Do not buy any opening dip until the NDX is back over 5,750.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email