Heading into Wednesday's trade, we were looking for the range to open up and for a continuation of the correction stage of the market which began on the 2nd in terms of a slowdown in upside activity, and really got under way on Monday afternoon with a pullback in price. Tuesday's session was quite narrow and very choppy, making the odds higher for stronger trend action on Wednesday. This began right away out of the open. The indices had gapped slightly higher, but the 15- and 30-minute 20-period simple moving averages, which were resistance the prior day, continued to hold and the market began to sell off just minutes ahead of the opening bell.

At about 10:00 am ET the market began to fall into its first congestion of the day. That congestion tried to break lower initially at 10:30 am ET when it was announced that crude inventories had fallen, leading to a new record high in crude futures at $112.21/barrel. It closed at $110.87/barrel. The breakdown attempt was a bit too early given the morning drop thus far, however, so the congestion continued with the 5-minute 20 simple moving average serving as resistance at 11:00 ET. Another strong breakdown followed into noon.

The second congestion move of the day took place heading into the early afternoon. With a downtrend firmly in place and the 5-minute 20 sma as resistance, it did not take much for the bias to remain on the bearish side. Volume dropped as the indices congested, supporting the bears through a lack of buying despite slight upside price movement.

Even though the Dow and S&Ps established new intraday lows into 13:00 ET, the prior 5-minute lows held as support on the Nasdaq and a longer congestion move formed into the 14:00 ET correction period. This is a typical time of the day for a late day move to occur and it corresponded to the 15-minute 20 sma once again. Volume had also remained light going into that resistance level, making it every easy for the bears to remain in control.

The downside into the final two hours of trading experienced a momentum shift that had not been seen earlier in the session coming off support levels. After making only slightly lower lows in the S&Ps and Nasdaq, the slowdown in the selling was enough to create a reversal pattern into the final hour of trading. The S&Ps and Nasdaq had both established three intraday lows, hence exhausting the intraday downtrend, and the Nasdaq had also hit equal move support on a 15-minute time frame as compared to the drop into Tuesday's lows. The 15:00 ET correction period helped as well.

I had looked for 1351.5 to hold as support on the ES (S&P 500 EMini). It was close though with a low of 1351.25. Notice how the ES and YM both hugged the 5-minute 20 sma before breaking higher into the last hour of trade. This is a key trait for a strong reversal. The stage was set for a rally into the close. It actually continued well past the closing bell, but the market was able to regain some of its intraday losses. The Dow closed lower by 49.18 points, or -0.4%, at 12,527. The S&P 500 lost 11.05 points, or -0.8%, and ended the day at 1,354. The Nasdaq Composite was again hit the hardest, falling 26.64 points, or -1.1%, to close at 2,322.

In the news, UPS (UPS) (-3.7%) cut its first-quarter earnings expectations, citing a weak economy and rising fuel costs. This led to widespread weakness in the transportation sector. The Dow Jones Transportation Average fell 3.52% on Wednesday. Even harder hit were the airlines. The Amex Airlines Index lost a whopping 5.24% with JetBlue (JBLU) down 6.4% and Continental Airlines (CAL) down 7.6% by the closing bell. The PHLX Housing Sector Index was another exceptionally poor performer, falling 3.87%. The Amex Gold BUGS Index, however, rose 2.02% and the PHLX Semiconductor Index also climbed, rising 1.54% on the day.

The market is looking bullish into the open on Thursday. The 60-minute time frames were all hitting support Wednesday afternoon and favoring a larger bounce off those support levels. This bias will be minimized if the indices manage to gap significantly higher, since larger than average gaps tend to fill within the first two hours. On the whole, however, I will be favoring the bulls for the first half of the day at least. 12600 will be Dow resistance, with 2350 as resistance in the Nasdaq Composite.







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.