Market action was mixed for the first half of the day on Tuesday. Although the morning trend was to the upside, the indices struggled to make new highs after about 10:05 ET. The session began with a modest upside gap in the indices which left the S&P 500 ($SPX) and Nasdaq Composite ($COMPX) back at 50% retracement levels as they bounced off Monday's lows back towards Thursday's highs. This left the indices at resistance into the opening bell and since gaps of this size tend to fill it did not take long for the market to start selling off.

Early morning support hit as the gap zones closed and the 9:45 ET correction period hit. The market began to chop around at that point. They started to favor an upside bias within the chop, but it took the 10:00 data to provide the market the boost it needed to break free. The Commerce Department reported that April orders for U.S.-made factory goods climbed 1.1%. This better-than-expected news sent the market flying... at least initially.

Dow Jones Industrial Average ($DJI)


The market rally out of the 10:00 data did not last long. The ES (S&P 500 Emini futures contract) was hitting a third high on an 800-tick chart and this signaled the beginning of trend exhaustion. The indices turned over relatively quickly, but the momentum slowed as the indices came into the lower end of the all sessions uptrend channel. This hit at about the same time as the 10:45 ET correction period. Since the market was making slightly lower lows at this time on the small intraday time frames such as the 1 minute chart, it created a rounded low into the support which allowed the market to rally fairly quickly.

Coming off the 10:45 zone lows, I began to watch for the indices to retest the morning highs for reversal patterns such as a double top or 2T, which is a type of double top that breaks slightly to trap bulls and flush out bears. The Nasdaq was the first to succumb to this pattern. It formed a double top into the 11:15 ET correction period. It then fell into a congestion level to form a small 2-minute Avalanche into noon which the S&Ps (ES) triggered its own reversal with a 2T at the 12:00 ET correction period. Setups such as this that show up on a 15-minute time frame will make it very difficult for the market to hit new highs on the day, particularly if the setups form over noon or into the early afternoon since they are trend-breaker patterns.

S&P 500 ($SPX)


Perhaps "trend-breaker" was a bit of an understatement. The market fell throughout the early afternoon. Given the larger pattern, I was watching for the setup to form a continuation pattern on the 5-minute time frame to continue lower. The 15-minute 20 sma was the support the indices needed to create that continuation pattern. The market congested along the support until about 13:30 ET. This was a relatively brief reprieve.

When the 15-minute 20 sma gave way it did so in a major way. The bottom completely fell out in the market. The Dow hit the prior day's lows first, but that didn't phase the bears at all. Next the S&Ps tried their prior day's lows, but this also broke in a matter of minutes. Finally the Nasdaq was testing its own lows from Monday. This zone held a little better, but the momentum was so strong it made it very difficult for the bulls to gain a foothold. The Russell 2000 was holding up the best on the day and this test of lows in the Nasdaq was the late afternoon low in the Russell from Monday with a bit of room to go before it's morning lows. As with the other indices, however, it did not take much of a pause in the market before its way was also paved to retest that level and break to new lows on the week.

Nasdaq Composite ($COMPX)


Finally, around 14:25 ET, the indices looked like they might be done with the strongest of the downside. At this time the ES (S&P EMini) was hitting its lows from the 27th. This was also the highs from the 22nd in the NQ (Nasdaq 100 EMini). Among several of the news events for the day was the firming up of Barack Obama's campaign for the White House when he won the Democratic nomination for the presidency. Another was a report by the Wall Street Journal that Lehman Brother (LEH) is facing its first quarterly loss since it went public in 1994 and would likely have to sell up to $4 billion in common stocks to raise capital. When the indices hit the support ahead of 14:30 ET it slowly reacted to the support due to the strong downside. This changed at 15:00 ET, however, when LEH denied rumors that it was going to try to access the Fed's discount window to help with its capital crunch. This led to a quick pop in the indices which eventually led them into the 15-minute 20-period simple moving average as resistance at 15:30. The indices pulled slightly off this resistance going into the close.

Despite the substantial losses in the second half of the session, the early morning gains and late day rally helped the market's overall results appear not very significant. The Dow ($DJI) closed lower by 100.97 points, or -0.8%, at 12,402.85. The range from highs to lows was more than 200 points though. Remarkably, only 20 of the Dow's 30 components posted losses. The S&P 500 ($SPX) lost 8.02 points, or 0.6%, and closed at 1,377.65 on Tuesday. The Nasdaq Composite ($COMPX) shed 11.05 points, or 0.4%, and closed at 2,480.48. Crude futures continued to slide, falling $3.45 to $124.31 a barrel. Gold also lost ground, shedding $11.5 (1.3%) to close at $885.5 an ounce. The prices have had no affect on gasoline prices, however, which remain at record highs of $3.98 a gallon for regular unleaded.

As the week progresses, I am still focused primarily upon corrective action coming down from those highs a few weeks ago. Right now it is looking like we will stair-step lower in the Dow and S&Ps at least, so look to prior daily lows as support levels and the 10-20 day sma zone as resistance. Corrections can last two to three waves. I am leaning towards three this time around with the second one currently under way. It will still take a week or so though before this plays out enough to give us a better indication if that action will still form.

Toni Hansen is President and Co-founder of the Bastiat Group, Inc., and runs the popular Trading From Main Street. She can be reached at Toni@tradingfrommainstreet.com.