Picking up where it left off on Tuesday, the markets continued lower into Wednesday morning. The index futures had been gaining momentum on the downside throughout premarket trade and by the time the opening bell rang there was a rather substantial gap in place. With this rapid decline, it became almost certain that the Dow would break through the lows established just one week earlier.

Typically, larger than average gaps in the indices will close. To do this, however, they need to first break through the highs of the first 15 minutes of the day in the case of a downside gap. When this happens then they will often fill within the first two hours. If those 15-minute highs hold, however, the odds increase that the market will find itself in a trend day in the direction of the gap.

In Wednesday's session the 15-minute high held perfectly. This was the 15-minute 200-simple period moving average zone in the Nasdaq futures and the market could not push past that level. Within the 15 minutes that followed, the indices all broke to new intraday lows. The Nasdaq led the way. At 10:00 ET the selling stalled and the market fell into a trading range along the day's lows. Volume declined, creating a continuation pattern which triggered just ahead of 10:30 ET. This move was stronger than the last and pulled the Nasdaq back into last Friday afternoon's lows.

Dow Jones Industrial Average ($DJI)


When support hit in the market going into 11:00 ET, it reacted rather swiftly. Even though the selling was on the strong side, the move was becoming very extended on a 15-minute time frame and volume spiked as an exhaustion move formed into the Nasdaq's prior lows. The indices quickly popped back up into the 5-minute 20 sma resistance where they paused for less than half an hour before pushing higher into noon.

The Nasdaq made the swiftest recovery mid-day, but all three of the major indices ran into strong resistance once again at the 15-minute 20 sma. This hit at the same time as the 12:00 ET correction period. The S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) had both formed three waves of upside on a 2 minute time frame as well, leaving them extended at the same time. The result was a steady reversal off the highs. The indices first found support at the 5-minute 20 sma which had previously served as resistance, but as before they held it only briefly before it gave way.

S&P 500 ($SPX)


The afternoon selling continued into 13:30 ET. At that point the S&Ps and Dow broke their downtrend channels. Since the momentum was not any stronger on the mid-day selling than it was in the morning, even though they hit slightly new lows on the day, these lows merely served as traps for a 2B reversal on the 15-minute time frame. It did take one more flush into that zone, however, around 14:15 ET to really get things turned back around and this made things a bit more tricky since it created additional chop once again intraday.

By 14:30 ET the market was again pulling higher. We had seen several similar waves of buying and selling on the 15-minute time frame and this created more of a range bound day than a true downtrend day despite the slightly lower lows and lower highs of the S&Ps and Dow. The market climbed into 15:25 ET at a similar pace as well. This made it difficult to break through the congestion at the prior highs and selling took over one last time into the close.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) closed lower by 131.24 points, or 1.1%, on Wednesday at 12,029.06. General Motors (GM) was one of the top decliners, down 5.88%. Bank of America (BAC) was another big loser, down 2.98%, while AIG (AIG) lost 2.35%. In the S&P only energy made gains, and they were minimal at best. The index fell 13.12 points, or 1%, and closed at 1,337.81. The Nasdaq Composite dropped 28.02 points, or 1.1% and closed at 2,429.71.

I am a little ambivalent about the market's direction on Thursday. The Dow made the new lows to go along with our altered outlook for the week, but they don't really look ready to bounce yet. The Nasdaq held the range better yesterday and is forming a base with a reverse cup with handle on the 30 minute time frame. This has it pointing lower, but it may still take another day to develop. It's not looking very pretty for the bulls these days. The weekly charts are all showing confirmation now and rolling over that the resistance zone we've been following the past two months, so there is a lot of room on those larger time frames for more downside this 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.