The price retracement we've been watching for hit full force on the heels of Tuesday's disappointing 25 basis point rate cut by the Federal Reserve. There had been a lot of debate as to whether the rate cut would fall at a quarter or a half percent, with a quarter percent as a given. Although I think we would have still fallen on a half percent, the drop was much more substantial with the lower end of the expected cut.

The Dow Jones Industrial Average ($DJI) lost 294.3 points, or 2.1%, and closed at 13,432.8 on Tuesday. The S&P 500 ($SPX) lost 38.31 points, or 2.5%, and closed at 1,477.65. The Nasdaq Composite ($COMPX) dropped 66.60 points, or 2.4% and closed at 2,652.35. American Express (AXP) was one of the biggest losers in the Dow, falling 5.2%. Two of the Dow 30 managed to close higher despite the sky dive action in the rest of the index. They were AT&T (T), which gained 4.1% on the announcement of a 13% dividend hike and share buyback and McDonald's (MCD), which has been making steady gains since its 2003 lows.



The session did not begin with a strong show of concern from the bulls. In fact, the market was up ahead of the Fed. The day had begun with a slight upside gap, a trading range for the first 45 minute or so, and a slow decline into the 11:00 ET reversal period. When that reversal period hit, the market was testing strong support with previous lows in the S&P 500 and the 15-minute 20 simple moving average in the Nasdaq Composite. While it began slowly, the market corrected off this support and a mid-day base up off the lows broke higher around 12:30 ET. The buying continued steadily until the 14:15 ET Fed announcement. We have been seeing more of this pre-announcement type of move lately, but the volume was pretty light throughout the day up until that point. This actually helped the market break down since it indicated that the bulls were not very confident.



After such a rapid freefall following the news, the market had a very difficult time correcting at all off support zones. A series of small bear flags followed the initial counter-move into 14:30 ET. The momentum slowed after the first drop, but then remained steady right into the closing bell. The session ended almost to the tick of Thursday's lows. While not noticeable on these charts, this support held in the immediate post-market action where the index futures bounced back up a bit in reaction to the support and intraday exhaustion.



The market tends to have a difficult time keeping up the pace after a day such as Tuesday, but we can still see some slightly lower lows. I will be taking things slow, however, since hammer and doji candlestick patterns, whereby the market moves lower and then back up to close near the opening price, is fairly common. Chances are that I'll be focusing mainly on reversal patterns intraday. This action is also typical of the onset of a larger price decline on a daily time frame, which would break with the choppier back and forth upside ahead of the fall that I'd been expecting that would have had a better chance with a 50 basis point cut. I am not yet ruling it out, however, and instead will wait to see how the next several days play out. If the market can hold Wednesday's lows into Thursday, then that scenario is still going to be valid.

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.