The market had a tough session on Tuesday on the heels of disappointing earnings reports. The top Dow decliner was DuPont Co. (DD). The chemicals company beat by $0.03/share, reporting revenues that were in line, however, the company also warned that weakness in construction and automotive markets would hinder growth. DuPont fell 4% by the end of the day. Texas Instruments (TXN) was another major player to announce early this week. It had reported earnings after the close on Monday. A poor outlook for the second quarter led to a drop of 5.8% on Tuesday. Telecommunications networking company Tellabs (TLAB), which has been in a steady decline since the middle of last year, was hit further after it reported lower first quarter profit and a disappointing second quarter outlook. It lost 13.8% of its share value on Tuesday.

The cumulative effect of the earnings data which came out between Monday afternoon and Tuesday morning created a modest downside gap in the indices. This gap took the Dow Jones Industrial Average ($DJI), S&P 500 ($SPX), and Nasdaq Composite ($COMPX) under the 15-minute 20-period simple moving average. This was the same zone as the afternoon lows in the S&Ps and Nasdaq from Monday and served as a solid resistance zone to begin the session. Early activity in the S&Ps and Dow also brought those two indices under their 5-minute 200-period smas.

The indices fell into a period of congestion following the morning gap which lasted throughout all but the final 15 minutes of morning trade. Volume dropped as the congestion narrowed following 10:30 ET with the indices basing at the intraday lows. The congestion finally gave way at 11:45 ET on strong downside into new intraday lows. This created a second wave of selling on the 30-minute time frame for the S&Ps and Dow. The downside continued until these indices had established an equal move as compared to the selloff from Friday afternoon into Monday's morning lows.

The mid-day downside also took the form of two waves of selling. The first wave took it into the 12:00 ET correction period. It stalled there for about 15 minutes and then continued into the 13:00 ET correction period. This was where the larger equal move level hit and the S&P 500 and Dow were able to test the closing highs from the 17, ahead of Friday's upside gap. This price support, the equal move support, and the correction period aligned with slowing downside momentum to create a high probability that the market would form another correction off support on the 15- to 30-minute charts as the afternoon progressed. Since the prior correction took most of Monday's session to form, the odds were high that the correction on Tuesday afternoon would hold into the close. It could either create a bear flag to continue the downtrend, or this could be the second wave of a two-wave pullback and lead to a move back into highs on Wednesday.

The market did congest throughout the remainder of the day. There was a slight upside bias, but nothing to suggest the correction could not be leading into a larger bear flag. This was true, at least, until the final hour of trade. At that point the upside momentum picked up somewhat and the indices congested near afternoon highs until the final 15 to 20 minutes of the day. At that point a Phoenix pattern on the 5-minute charts broke higher.

The Dow closed lower by 104.79 points, or -0.8%, at 12,720.23. The S&P 500 fell 12.23 points, or -0.9%, to end the session at 1,375.94. The Nasdaq Composite lost 31.10 points, or 1.3%, and closed at 2,376.94.

The late day Phoenix setup followed through into afterhours trading with a strong surge higher that took the indices back into the congestion from the morning's activity. The bias remains bullish into Wednesday morning with Friday's highs as the larger time frame resistance. Once again, however, opening data is going to be much more reliable in offering a more accurate intraday bias than the afternoon data from the previous session.

Dow Jones Industrial Average ($DJI)


S&P 500 ($SPX)


Nasdaq Composite ($COMPX)


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.