The market has been experiencing a series of steady uptrend moves on a 15-minute time frame followed by substantial pullbacks which erode a large portion of those gains more rapidly than they were obtained. After Friday closed with a bias for another wave of upside on the 15-minute time frame into Monday, I was convinced we would see yet another example of such action to begin the new week as well. This time around, however, the indices were becoming a great deal more extended due to a 60-minute trend which had been in play since the 9th. This had me watching for an even larger pullback off highs than those of recent days.

Dow Jones Industrial Average ($DJI)


The morning began on Monday with a relatively even open after an inactive shortened session Sunday in the futures and slow premarket activity. This left them at the price resistance from the equal move on the 15-minute time frame that hit in the final hour of trade on Friday. The indices were able to continue this correction into the first reversal period at 9:45 ET, allowing them to form a decent bull flag that followed through quite well. The Nasdaq Composite ($COMPX) had been leading the upside over the last couple of weeks, but while it also experienced the sharpest pop out of the flag on Monday morning, the rally in that index lasted only 30 minutes and faltered from that point onward throughout the session.

Yahoo (YHOO) had received a little bit of a boost into the open that gave tech shares a bit of a push to begin the day. Microsoft (MSFT) had announced that it was again in talks with the company for a deal that would not involve an acquisition as previously designed. This could be particularly accountable for the early morning strength in the Nasdaq, but Amazon (AMZN) was a more significant player, rallying 7.6% on Monday following an upgrade by Goldman Sachs. Unlike many of the top names in recent weeks, AMZN was able to withstand the late day selloff pressure that tormented the broader market.

S&P 500 ($SPX)


The Nasdaq stalled its break to new highs on the month with the onset of the 10:15 ET correction period. The S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) kept crawling higher. While they made new intraday highs, the Nasdaq had begun to form a bull flag on the 5-minute time frame with the 5-minute 20 sma serving as support. The S&Ps and Dow stalled and fell into ranges along highs at approximately 10:35 ET. All three of the indices broke higher coming out of the 11:15 ET correction period, but the Nasdaq had experienced a greater price correction and ran into some trouble at the morning highs.

The Dow took the lead throughout the remainder of the morning and into the early afternoon. Among the Dow's leaders on Monday were Alcoa (AA) (+3.3%), Boeing Co. (BA) (+2.2%), and Chevron Corp. (CVX) (+1.8%). Lowe's (LOW) (-2.6%) and Microsoft (MSFT) (-1.8%) were two of the weakest components. Overall market strength was found in utilities, telecoms, energy, and industrials. Crude-oil prices hit highs of $127.77 a barrel and were followed by a record close of $127.31 a barrel.

Nasdaq Composite ($COMPX)


Meanwhile, as the Dow and S&Ps advanced, the Nasdaq barely managed a slightly higher high. This exhibition of upside pressure would eventually help signal an imminent reversal. Over noon the indices again experienced a price and time correction. The Dow broke with a small bull flag/base at highs coming out of noon, but while the S&Ps had formed only a slightly weaker bull flag, the S&Ps merely crept higher into 12:30 ET, remaining equidistance from the 5-minute 20-period simple moving average as it ascended. This accentuated the Nasdaq's weakened status and began to create favorable conditions for an S&P reversal as well. All that was left was for the Dow to decide to play along.

A final pullback into 13:00 left all three indices hugging the 5-minute 20 sma support fairly well. The Dow by this time was hitting prior daily highs for strong price resistance and the S&Ps were testing the upper trend channel line from the channel which has been in place for the past several months. Both of these larger time frame resistance levels, combined with the weakened momentum and larger trend exhaustion formed the perfect habitat for a strong afternoon reversal to emerge. This breakdown began coming off highs at 13:30 ET and accelerated past the 14:00 ET correction period, stalling for only a minute or so at each of the nearby support levels before finding initial support on a 5-minute and 15-minute time frame at Friday afternoon lows in the Nasdaq, opening highs in the S&Ps, and 10:35 am ET highs in the Dow.

Although a number of the recent breakdowns such as this have rolled over and back into recovery mode following the initial 15-minute move, two-wave corrections in general are much more common and the larger resistance left me favoring a close at or near the session's lows. A gorgeous base into the 5-minute 20 sma offered the perfect opportunity to jump on board for those that missed the initial turn of the tide off the day's highs or merely another opportunity for those that had been tracking the move throughout.

The Dow fell into the 13,000 level in a matter of minutes, taking it back into Friday's afternoon highs and 5-minute 200 sma support intraday. Meanwhile the S&Ps hit support at morning lows and mid-day highs from Friday, and the Nasdaq futures broke Friday's lows to return to late afternoon congestion from Thursday. All of these support zones hit on strong exhaustion volume with 20 minutes to spare before the closing bell. The result was that I did not exactly get my close at the day's lows, but it was still still quite a punch for the market that left it reeling into the early morning hours on Tuesday.

The Dow on Monday gained 41.36 points, or 0.3%, despite the collapse, and closed at 13,028. The S&P 500 also posted a gain, albeit slight, of 1.28 points, or 0.1%. It closed at 1,426. The Nasdaq felt the full force of the blow and landed lower by 12.76 points, or 0.5%, to close at 2,516.

The indices do have support once again heading into Tuesday morning. Both the S&P 500 and Dow Jones Ind. Ave. are hitting the lower trend channel support from the channel in play since the 9th. I am expecting the market to pull back and correct longer on the daily time frame now at this time, however, with Nasdaq support levels at 2493, 2480, and 2440. The odds of testing 2493 on Tuesday are quite high, but I will be watching for an Avalanche pattern on the 60-minute time frame to take it into the second support level. The Dow may form more of a descending triangle before it can give way, although the S&Ps can also create an Avalanche fairly easily on that time frame. Upside will be choppy and higher risk, limited primarily to scalps or news-driven securities.

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.