So far this month the indices have taken some wild swings back and forth intraday. A few weeks ago my family and I took a day trip up to Busch Gardens in Tampa. My daughter is a roller coaster fiend, so of course we rode on every one in the park. While I still have no luck getting even the slightest little feathery feeling or rush from roller coasters (hey... 12 years in the markets means it takes a lot more than a roller coaster to cause a thrill), the market's action today bore a striking resemblance to the newest enhanced coaster at the park: SheiKra.
The basic description of the ride could aptly be borrowed and applied to today's indices. Named after an African hawk that is known to dive straight down for its prey, SheiKra makes a steady climb up a 47-degree track, turns and pauses, and then drops the bottomless cars straight down at a 90-degree angle before it whips back up and sends riders into what is called an "Immelmann loop." The coaster then takes its passengers into a second drop of 81 degrees.

Ok, so the markets didn't exactly have an Immelmann loop going on, but it had the sharp ascents and even sharper descents nailed! After hitting lows on July 4 during a shortened trading session, the index futures began to recover steadily in overnight trade beginning on Sunday evening. This recovery continued into the opening bell on Monday. At 5:30 am ET the index futures broke free from a high level trading range which led to three waves of buying on the 5 and 15-minute time frames. The third wave took place into the open and continued for the first 30 minutes of trade.

When corrections between upside moves take approximately the same time to form in an uptrend, then a third wave of buying is generally the final chance a security or index will have to establish a move of comparable or greater strength than the prior two. Following that third move, a longer correction is generally necessary to balance things out. Even if there is a fourth attempt after another comparable correction in time, that fourth move will not be nearly as strong as the prior three and will more often create a trap pattern such as a double top, 2T or Avalanche to lead into a correction of greater length. This is exactly what we experienced on Monday.

Dow Jones Industrial Average ($DJI)


After hitting highs around 10:00 ET, the pace of the buying slowed and the market turned over with a pullback into the 10:15 ET correction period. Although the time correction zone held, the indices could not gather enough strength to break to a new high and instead began to fall into a longer trading range, hence breaking the uptrend with the formation of a lower high.

This did not have to be the end of the trend. Had the pace shifted once again into a second low on a 5-minute time frame intraday with a stronger pop off the low and another little base, the indices could have easily formed a triangle with an upside bias. Given the larger 60-minute triangle breakout with the gap, this is what I had originally been watching for. Between 11:00 and 11:45 ET, however, the indices failed to pull back up to the upper end of the trading channel for a base at a third test of highs. Instead the pace shifted a final time with a sharp drop into 11:45 ET to create a bearish bias into noon.

The new bias held with the indices formed a trading range along the zone of the intraday lows into noon. The light volume during this range confirmed that the bulls had now moved to the sidelines. This was comparable to the roller coaster when you sit paused, looking straight down at the drop to come just before it releases and sends you plunging lower. You could almost hear the gasps of astonishment when the markets began their own freefall.

The S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) had absolutely no trouble closing their morning gaps. Those of you who read this column regularly will likely recall that on a day which gaps to the degree that we experienced on Monday, if the highs of the first 15 minutes break, the odds are high for a trend day higher. Monday proved to be an exception. Although it broke through the 15-minute highs, it managed to do so by only a few ticks and then rolled over. This was enough to cause a trap, however, and when the morning lows gave way, triggering stops and new short sales, panic again took over.

S&P 500 ($SPX)


The downside continued with a bear flag at 12:30 ET to lead to a new intraday low at 13:0 ET. By this time the Nasdaq had also closed its gap and the continuation led it into another support level from Thursday's lows. At this point the larger momentum was again turning. A final flush into 14:00 ET created a 2B pattern on a 5-minute time frame in the EMini futures with the indices hitting a slightly lower low to flush out some weak hands and trip new short sales for those thinking the bottom really had fallen out. The reversal was not a pretty one. Even though a Phoenix followed along the 5-minute 20-period simple moving average, the indices did not show much of a change of pace on a 1 minute time frame and were still displaying strong downside moves on that level. This made the 15:00 ET trigger for the Phoenix a bit tricky. As soon as the upper channel along that 5-minute 20 sma broke, however, the ascent was rapid and steady.

Resistance hit for a final time intraday into the 15:30 ET correction period. The Nasdaq EMini futures contract was back into the congestion from the morning, while the S&P Emini futures were running into 5-minute 200 sma resistance. At that point the Dow also hit a substantial resistance level. It was finally back in positive territory and moved directly into the opening price level, which held perfectly in the YM (the mini-sized Dow futures contract). This was followed by that second drop I spoke of at the beginning of this column which took the indices sharply lower once again into the closing bell.

Nasdaq Composite ($COMPX)


When all was said and done, the Dow lost 56.58 points, or 0.5% on Monday to close at 11,231.96. The S&P 500 fell 10.59 points, or 0.8%, to close at 1,252.31. The Nasdaq Composite lost 2.06 points, or 0.1%, and closed at 2,243.32. The downside on the day was propelled by losses in the financial sector. Mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) both tumbled more than 16% with FNM down 16.3% on the session and FRE down 17.9%. Drug manufacturer Merck & Company Inc. (MRK) led losses on the Dow after a downgrade by UBS, while oil, energy, and gold stocks also posted large losses. These had all gapped lower while the market rallied, but when the market turned, they failed to pick up the slack. Crude oil closed at $141.37 a barrel for the August contract, down $3.92 a barrel, while August gold futures fell $4.80 to settle at $928.80 an ounce. On the bright side, Yahoo Inc. (YHOO) shares rose 12% on renewed interest on the acquisition front by on again, off again suitor Microsoft Corp. (MSFT).

Although the reversal pattern I had been watching for on the 60-minute time frame failed to provide confirmation on Monday, it has not confirmed a failure either. The lower end of the channel from this past week held, despite the slightly lower low in terms of absolute price. This means that the larger channel for the month remains more gradual than the prior selling pressure. I am not a particular fan of this type of market environment when it takes place on anything larger than a 15-minute time frame, even though I love it on the smaller intraday charts. It is too easy to get chopped up while waiting to see whether or not the setup will follow through.

Although I managed to come out ahead on Monday, it was not much to brag about since many traditional setups failed to follow through or only offered small gains before reversing. I plan on continuing to treat the market gingerly heading into Tuesday's session as well. Although my bias does still favor a greater correction off this support zone on the daily time frame, the market was weak into Monday's close and in afterhours trade. A downside gap at this point will have a good chance of closing in the morning.

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.