Good morning! We continued to correct off Monday's lows on Wednesday morning as expected. Once again, however, the market did so primarily through a rather substantial upside gap into the open. As we saw the day before, this made it difficult for the market to keep going since a lot of the potential was taken out by the gap. We did see some initial buying again as the SP500 futures broke out of a strong premarket base at highs on the 15 minute all sessions charts. This was able to put in an equal move on that time frame in the morning before hitting the equal move price resistance with the 10:45 ET reversal period. The NASDAQ had a tougher time moving higher because it hit strong resistance a bit sooner in the form of its 15 minute 200 sma.

As the morning progressed, the NASDAQ formed a very solid triangle on the 5 and 15 minute charts. Initially it was more bullish because the downside pace within the base had slowed. The extension on the 15 minute SP500 and Dow Jones Ind. Ave., however, made an upside resolution less likely and higher risk. By the time the triangle actually broke, shortly after 12:00 ET, the pace had turned back over again to favor the bears by hugging the support from the range in all three indices on the 5 minute charts as volume dropped off significantly. The short triggered at about 12:15 ET and the NASDAQ very quickly filled its gap while the Dow dropped back into opening lows before finding support. The SP500 and Dow's 15 minute 20 sma also hit at the same time.

With the strong turn over off mid-day resistance after several days of buying, it was probable that we had seen the day's highs. I began to watch for a 5 minute bear flag using the 20 sma on that time frame as resistance. This triggered a short set up soon after 13:30 ET and led to another strong wave of selling, putting in an equal move as compared to the initial drop off highs before correcting again on the 5 minute charts.

The market had room for a third wave of selling since the daily charts were still rather extended due to last month's upside. The next sell setup triggered a bit more quickly than I expected because the correction off the 14:30 ET support was about half the length of time as the prior one and didn't quite hit the 5 minute 20 sma before it gave way once more. The move was again strong on the 5 minute charts, taking the SP500 and Dow Jones Ind. Ave. back into the prior day's lows. Since we don't tend to get three waves of selling without it being followed by a greater correction than the prior two, the market was able to bounce into the close, even though the pace remained gradual.

On Thursday we should get more of a narrow range. The market had quite a move intraday and needs to correct before it can put in a decent intraday trend again. Following three waves of selling, I would expect a correction of at least twice the amount of time between the prior two before selling can hit strongly. If it's only about twice the amount of time as between the prior two drops, then the fourth move will tend to be followed by a larger pivot and end of that intraday trend. If the correction is 1.5-2 times the time it took for the prior three waves of selling, then it can put in another intraday trend move of comparable length once that correction breaks. A third option is that the market doesn't rest longer than the prior two corrections and instead rounds off at lows with a 2B. This would be the pattern that would have the best odds for bullish action intraday. We will have to see what the morning action is like though to see which of these three develops.

Updates: VAR from the 20th $38 around hit new highs the 27th at $40.70 before closing on the day with a base at highs ahead of earnings for swingtraders. For a larger position trade I want the 20 day sma to hold. I am watching HSP for a breakout on the daily and weekly charts, but it can easily take a few weeks to even a few months to develop with the 20 week and 20 month simple moving averages serving as support. QLGC is on my watch list as a longer term short on a break down out of the current weekly low-level base.

Economic Reports and Events
Aug. 11: Initial Claims 08/06 (8:30 am), Retail sales for Jul. (8:30 am), Retail sales ex-auto for Jul. (8:30 am), Business Inventories for Jun (10:00 am)
Aug. 12: Export Prices ex-ag. For Jul. (8:30 am), Import Prices ex-oil for Jul. (8:30 am), Trade Balance for Jun (8:30 am), Mich Sentiment-Prel. For Aug. (9:45 am)
Aug. 15: NY Empire State Index for Aug. (8:30 am)
Aug. 16: Building Permits for Jul. (8:30 am), Core CPI for Jul. (8:30 am), CPI for Jul. (8:30 am), Housing Starts for Jul. (8:30 am), Capacity Utilization for Jul. (9:15 am), Industrial Production for Jul. (9:15 am)

Earnings Announcements of Interest
Only stocks with an average daily volume of 500K+ are listed. List may not be complete so be sure to always check your stocks' earnings dates before holding a position overnight. (A) = Earnings after the close, (B) = Earnings before the open, (?) = Earnings time not specified at the time of this writing
Aug. 11: ADI (A), BGO (A), EAT (B), CREE (B), DELL (A), DT (02:00 am ET), DWA (A), ELX (?), FMD (A), HSP (B), ICST (?), JJZ (B), JMDT (A), KSS (?), NVDA (A), PSUN (A), PHH (A), TGT (B), TLWT (B), UBB (?), URBN (B)
Aug. 12: ALTI (?), ERJ (A), MOVI (B), PBR (?)
Aug. 15: A (B), MIVA (B), GG (A), KEP (B), LOW (?), PLAB (?); SYY (B)
Aug. 16: ANF (A), AEOS (B), AMAT (4:30 pm ET), BJ (B), DE (B), HPQ (?), HD (B), JCP (B), JWN (?), SPLS (?), EL (B), TJX (B), WMT (B)

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.