Subprime Drama Sinks Stocks

"Tomorrow at the open we'll probably test that 1375 [level] and then get a snapback," says the trader. "But if it breaks 1375, I'm gone. I'll buy a dip here, but if it doesn't act well, 'See you later.' That's what everyone is doing."

The source, who requested anonymity, says the selling in the financials has been overdone and believes Lehman Brothers' (LEH Quote) first-quarter results will be the key to Wednesday's response to Tuesday's thrashing.

The broker "has said publicly they're totally hedged in subprime," he says. "If they get the Street to believe that, [the rebound] could be nice. The world hasn't changed that much."

And if I can get the folks at Carnegie Hall to believe I can sing...

Speaking of the financials: Concerns about a spreading of the so-called subprime fungus weighed heavily on names exposed to the sector, including Lehman, Washington Mutual (WM Quote), JPMorgan Chase (JPM Quote) and Bear Stearns (BSC Quote), which fell between 4.4% and 6.65%.

Even Goldman Sachs closed down 1.8% to $199.03, after trading as high as $208.56 intraday. The Amex Broker/Dealer Index lost 4.4%, and the Philadelphia Stock Exchange/KBW Bank Index shed 3.3%.

"Today Goldman reported good numbers and the stock is off $10 from its [intraday] high," says one market watcher. "That's not a very good sign short-term and says the corrective phase isn't over."

The source, who requested anonymity because of his firm's compliance requirements, also says the chart of the UltraShort QQQ (QID Quote) suggests more weakness ahead.