The conflict between Israel and Hezbollah escalated Thursday, casting a dark shadow over the financial markets. U.S. stocks broke down as the Nasdaq Composite reached a new low for the year, falling 1.7% to 2054.11. The Dow Jones Industrial Average dropped 1.52% to 10,846.29, while the S&P 500 fell 1.30% to 1254.11. "People are pretty surprised by the follow-through on Wednesday's market," says Timothy Heekin, director of equity trading at Thomas Weisel Partners. If tomorrow was Tuesday, the market might have a chance to rally; but given the uncertainty over what might happen in the Middle East on the weekend, "people will take them stocks out ugly on Friday and end the week to the downside," he predicts. As oil soared to new highs, investors continued to rotate into defensive sectors and assets, such as gold and Treasuries. In the aftermath of Thursday's shellacking, traders and market watchers didn't hesitate to predict selling will beget more selling. "I think the bear market has started everywhere," says Dennis Gartman, editor and publisher of The Gartman Letter, suggesting the sharp drops in Middle Eastern markets earlier this spring were the proverbial "canary in the mineshaft." Ominously for those hoping for a quick end to the selling, U.S. indices have only experienced moderate declines as yet, compared with corrections of between 20% and 50% in some emerging markets. On Thursday, the iShares MSCI Emerging Market Index ( EEM) followed the U.S. markets and fell another 3.5%. With the Nasdaq pacing the decline, U.S. markets are retesting their June 13 lows, but there may be more room to go in this bearish move. John Roque, technical analyst at Natexis Bleichroeder, writes the market only reaches a "major oversold" reading when 20% or fewer of the stocks on the Big Board are trading above their 200-day moving average -- a phenomenon that has occurred every four years since 1994. Going into Thursday, 52% of stocks were below their 200 day moving average.