Wow! What a ride! I was thinking yesterday how I should have waited to have sent the previous column yesterday instead of at the start of the weekend! A great deal changed in the world as the United States awaited the start of trading following the extended three-day weekend. It began in the early morning hours on Monday as the markets began to plummet overseas. At one point I logged on and saw the Dow Jones futures down more than 600 points. I thought it must have been some sort of data issue. I had gotten a call around 2:00 am ET that the markets were crashing, but little did I know!



Shortly after 8:00 am ET the Fed announced an emergency rate cut in an attempt to ward off further declines. They reduced the benchmark rate by 75 basis points to 3.5%. This was the first move of this scale since the aftermath of 9/11 and they left the door open for another 25 basis point cut next week. When the market actually opened, however, a lot of the immediate gains following the Fed's announcement had been erased. Nevertheless, as you may recall from previous posts, huge gaps such as the one Tuesday morning almost always attempt to fill. This is particularly true when they follow several days of selling and gap lower or several days of buying and gap higher.



The market spent a decent chunk of the morning on Tuesday attempting a recovery. The buyers emerged right away again into the open and the market climbed very quickly for the first 20-25 minutes of the day before stalling. Two more waves of upside followed. Each was slightly less extreme than the previous one. The third push came around 11:00 am ET and both the S&P 500 and Dow Jones Industrial Average managed to return to the zone of Friday's close. The Nasdaq Composite fell a bit short. It only returned to Friday's lows before stalling at that resistance level.

The extent of the morning's rally, combined with the resistance, helped push the market into a correction phase intraday over noon. Although the market was very extended and showing significant exhaustion, the bulls were definitely feeling some pain and lacked confidence to push the market higher into the afternoon. Instead, the remainder of the trading day was spent in a range along the intraday highs. The market chopped back and forth at those levels before breaking lower again afterhours. The selling continued with two waves of downside into midnight before turning higher again into the early morning hours.



At the time of the closing bell on Tuesday the Dow was down 128.11 points (-1.1%) and closed at 11,971.19. The S&P 500 ($SPX) lost 14.69 points (-1.1%) and closed at 1,310.50. The Nasdaq Composite ($COMPX), which felt the brunt of the selling pressure, lost 47.75 points (-2%) and closed at 2,292.27. Given Tuesday's flush, there is a very strong probability that the market will attempt a larger correction off the lows as the week progresses. In the long run, however, I would not be betting on any new record highs for quite awhile. Upside on the monthly time frame is just likely to lead to yet another larger downside move to give us those larger corrections we have been watching out for since this past summer.

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.