The market had a really tough day on Tuesday after selling pressure increased in afterhours trading Monday evening and Tuesday morning. This pushed all potential for a range along the daily resistance levels right out the window and set the day up for continued downside. Typically the extreme gaps in the indices attempt to close, but since this time the gap was also off a major daily resistance level and marked a break in the uptrend of the past two weeks, it created one of the exceptions to the rule. While I've talked a lot about this in the past, we haven't seen it happen for quite some time. The result was that even though the market was opening into support, the risk was higher that bulls attempting to buy the gap would have a rough time.

The market did try to hold the lows initially. The market pulled up slightly beginning at about 9:45 am ET, but a more gradual pullback following the 10:00 ET ISM data failed to break strongly higher through the 5-minute 20-period simple moving average. Instead the resistance held well and the choppy selling of the previous session continued.

The Institute for Supply Management (ISM) stated that its nonmanufacturing index fell to 41.9% in January off 54.4% in December. It had been expected to slip to 53%. When if move to under 50% it indicates economic contraction. This was the largest drop in the index's history and was the first time the index had hit that level since October 2001.

Despite the data, the market was so oversold at the open that the effect was not immediate. When coupled by the Richmond Federal Reserve President Jeffrey Lacker's pronouncement that the economy may be heading to a recession, however, the bears had no problem taking the lead. It's not that this is news by any means, since it's been on everyone's lips for weeks, but he is the first Fed official to actually lend his voice to it.

The market moved lower throughout the entire day on Tuesday. It was divided into three main waves on the 15-minute time frame, but the moves were again on the more choppy side. The trend corrected twice within the downtrend. The first was at 11:15 ET and then again out of the 14:00 ET correction period. By the end of the day all of the major indices were at new lows on the week closed at those lows.

The Dow Jones Industrial Average ($DJI) fell 370.03 points, or 2.9%, on Tuesday. It closed at 12,263. Every single one of its 30 components posted losses. The index experienced its largest percentage decline since this time last year and was the largest point loss since last August. The worst performers were J.P. Morgan Chase (JPM) (-7.4%), Citigroup Inc. (CIT), American Intl Group. (AIG) (-4.5%), and American Express (AXP) (-4.1%).



The S&P 500 ($SPX) fell even further than the Dow. It lost 44.18 points, which was a 3.2% decline. It closed at 1,336. Whirlpool Corp. (WHR) was the biggest S&P winner with a gain of 10.31%. Computer Sciences Corp. (CSC) (+6.03), and Avon Prods Inc (AVP) (+5%) also moved higher. NYSE Euronext (NYX) was the largest losers, down 14.14%. Principal Financial Group Inc. (PFG) (-11.22%) and Mgic Invt Corp (MTG) (-10.08%) were other top losers.



The Nasdaq Composite ($COMPX) was also hit hard on Tuesday. It lost 73.28 points, or 3.1%. It closed at 2,309. Only 4 stocks in the Nasdaq 100 closed in positive territory: Wynn Resorts (WYNN) (+7.09%), Google (GOOG) (+2.29%), Ryanair Holdings (RYAAY) (+0.43%), and Intuitive Surgical Inc (ISRG) (+0.12%). Top losers were Garmin Ltd (GRMN) (-8.44%), Logitech Intl (LOGI), (-8.10%), Hii Holdings (NIHD) (-7.49%), and Infosys Tech (INFY). Unfortunately for the bulls, most of these look to continue lower this week.



Even though the market ended the day rather extended, due to the channel break of the upside from the past two weeks we are facing more downside into the weekend. The previous lows on the daily charts will be support; and if the momentum can slow a bit, then stall just before the absolute lows, then we are looking at a triangle range likely to form on the daily time frame. If the momentum is strong, however, then slightly lower lows would create a trap to allow for a bounce back to the 20-day sma again with a third move lower possilbe into the end of February/early March. I expect volume to be lighter on the descents than it was a few weeks ago.

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.