As we expected, the market opened sharply lower on Tuesday morning following disappointing earnings reports from several heavyweights. After trading lower in overnight trade, Apple (APPL) opened down 12% at $149 after topping its quarterly earnings expectations, yet falling short on its fiscal fourth-quarter outlook. It had closed at $166.29 on Monday. Texas Instruments closed at $28.52 on Monday, yet it opened at $24.89 on Tuesday with continued selling out of the open to hit lows of $23.43 early in the session after it reported lower-than-expected earnings and lowered its third quarter guidance. After stronger-than-expected earnings from financials such as JPMorgan (JPM) and Bank of America (BAC), eyes were on American Express (AXP) and Wachovia (WB), but both disappointed Wall Street.

Dow Jones Industrial Average ($DJI)


As I discussed in yesterday's column, when the market experiences a substantially larger-than-average gap overall, the general tendency is for the gap to fill. The trick to being on the right side following the gap is to stand by and just watch the action for the initial 15-20 minutes of the day. On a sharp downside gap, if the 15-20 minute high breaks soon afterwards, then the odds are favorable that the gap in the indices will fill in AT LEAST one of the major indices within the next two hours. If the 15-minute highs hold, however, and are followed by a break lower, then the odds favor a morning trend on the downside which will often be followed by a trend day lower.

The Dow Jones Industrial Average ($DJI) was down approximately 58 points 15 minutes into the day. The Nasdaq Composite ($COMPX) was down nearly 24 points. The S&P 500 was down about 10 points. The session began at equal move price support as compared to Monday morning's decline. Prices had stabilized following the open as they held this support, creating a base-like formation with congestion in the initial 15 minutes. The momentum was gradual on the downside, creating favor for a break higher out of that range. This took place coming right out of the 9:45 ET correction period.

Once the gap began to fill, the Dow mini-futures (YM) did not stop until it had fulfilled that goal. It was the first of the three indices to close their gap. This gap closure level served as initial resistance and a minor correction followed. When the 10:15 ET correction period hit the market again took off. This second wave higher closed the S&P EMini gap (ES). Once again the gap closure marked a strong intraday resistance level. A second correction followed, but the magnitude of this second correction was stronger than the first. This allowed it to correct further with a two-wave pullback on the 5-minute time frame. The 5-minute 20 sma acted as support for the ES and YM, holding both waves of correction. Light volume confirmed the continued presence of a bullish bias and the indices broke higher again out of the 11:00 ET correction period.

S&P 500 ($SPX)


The Nasdaq EMini (NQ) was having a more difficult time holding on following the gap since the techs left it with more ground to make up. It had fallen off its 5-minute 20-period simple moving average after running up with the rest of the market and this turn lower took it back into that initial morning breakout territory. This level of action did a decent job of holding as support, so it was able to rally out of 11:00 ET as well. While the ES and YM broke to new intraday highs and positive territory, however, the NQ fell short.

The three indices began to correct again into noon. This pushed the market into a very long period of congestion. The NQ caught a little action out of 13:00 ET on a two-wave pullback on the 5-minute, but it failed to get past earlier highs and was followed by a rapid, albeit minor, flush out of 14:00 ET.

Although the pace shifted on a 5-minute time frame at 14:00 ET, the market's larger price bias remained bullish. Upside pace picked up one the market was able to break its prior 5-minute highs soon after 14:30 ET. A base formed from that point into about 15:15 ET. Volume was light throughout the base, lending itself to a bullish bias for the breakout. By this point Apple and a number of the other strong downside gappers had also formed high-level intraday bases and broken higher. These movers helped hold up the market as it broke the range and rallied into the close.

Nasdaq Composite ($COMPX)


Given the extent of the gap in the NQ, I was actually quite surprised that it managed to make such a come-back. By the close the NQ had managed to fill its gap. The Nasdaq Composite ($COMPX) faired substantially better than its futures counterpart. The Composite closed its gap early in the session with the rest of the market. It was able to tack on a 24-point gain by the close, ending the session up 1.1% at 2,304.

The Dow Jones Industrial Average ($DJI) gained 135.16 points on Tuesday, closing higher by 1.2% at 11,602.5. 21 of its 30 components closed in positive territory. The financials were among both the biggest gainers and losers on the day. American Express (AXP) closed lower by 6.5%, while Bank of America (BAC) climbed 13.3%. Merck & Co. (MRK) weighed down the Dow to some degree with losses of 11.3% on the day after its earnings report.

The S&P 500 ($SPX) rose 17 points, or 1.4%, and closed at 1,277. Financials overall gained 5.9%. Washington Mutual (WM), despite its gap lower in the morning, closed higher by 6.8%. Wachovia (WB) gained 27.4%. E-Trade Financial Corp. (ETFC) gained 11%. Consumer discretionary climbed 3.1%. Energy fronted losses, down 3.3%.

At one point, crude oil was down more than $5 to under $126 a barrel on the New York Mercantile Exchange. September delivery for crude closed at $127.95 a barrel, down $3.09. The Amex Oil Index ($XOI.X) closed lower by 1.6%, while the Amex Natural Gas Index ($XNG.X) fell 4%. Crude and gasoline are both down more than 13% off their July 11 intraday highs. The national average retail price of gasoline, however, has not budged and stands at $4.055 a gallon.

Heading into this week I was looking for a larger daily correction off the 20-day sma resistance which had hit in the market heading into the weekend. The congestion along highs, however, broke on the upside on Tuesday following the gap recovery and it's now looking as though that pullback is going to take a bit longer to develop. The Nasdaq even has an inverse head and shoulders pattern on the 60-minute time frame. Last week's highs in the Nasdaq and the gap from the 26th in the Dow and S&Ps will now serve as the next main resistance level.

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.