The market gave us both the lower lows we were looking for as well as the greater price overlap from one day to the next on Tuesday. The session began with a decent upside gap into the open, but such gaps rarely hold in the indices themselves and the selling we had been expecting set in fairly quickly. Opening highs held within a few ticks in the morning. The first continuation lower took place into 10:00 am ET into the 10:15 ET correction period. Another bear flag formed at that point, but the momentum did not increase until the breakdown around 11:15 ET. When the morning congestion gave way to new lows on the day the market plummeted. Sellers took over on increasing volume into the 12:00 ET reversal period.



The 12:00 ET reversal period held very well for the market. The exhaustion move on the 5-minute led to a very slow turnover since the momentum into the lows was very rapid indeed, but the bulls gradually peaked their heads out, encouraged as the day progressed by more news out of the Fed on plans to tighten the lending practices to head off any new lending crisis such as the one that has struck the economy over the last couple of years. The proposal includes tighter rules on prepayment penalties and verification of the borrower's income to keep people from getting in over their heads based upon a wish and a prayer.



The market continued higher throughout the first half of the afternoon at a steady clip before hitting resistance at the 14:30 ET reversal period. At that point the indices had struck the morning highs, which served as strong price resistance. The momentum in the Nasdaq had begun to shift at about 13:30 ET. Although the Dow and S&Ps formed solid bull flags into the 14:00 ET correction period, the Nasdaq made a series of higher highs. With the third high, the Nasdaq had completed the formation of a reversal pattern, which triggered at about 14:30 ET. The other indices followed the Nasdaq in its correction, but while the strength of the Dow and S&Ps helped it retest highs in the final 30 minutes of the day, the Nasdaq hugged the 5-minute, 20-period simple moving average and attempted to break lower into the close on an Avalanche short setup.



On Tuesday the Dow ($DJI) closed higher by 65.27 points at 13,232.5 (+0.5%). American International Group Inc. (AIG) led the move, adding 3.1% by the bell. 21 of the 30 Dow components posted gains. Two of the main losers were in the financial sector: Citigroup Inc. (C) (-1.3%), and J.P. Morgan (JPM) (-1.4%). The S&P 500 ($SPX) rose 9.08 points on the day, or 0.6%. It closed at 1,454.98. The Nasdaq Composite ($COMPX) had the strongest showing, with more room to move after the steeper selloff in the previous session. It gained 21.57 points, or 0.8%, and closed at 2,596.03. There is still room for another lower low on Wednesday, but I would expect a bit of upside and continued overlap into the weekend as volume declines.

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.