Heading into Tuesday's session we were looking for a slightly lower low in the indices on the 60-minute time frame to create pattern known most commonly as a "2B". This pattern consists of an initial low, followed by a slightly lower low. This essentially creates a type of bear trap by breaking through the previous low by just enough to take out stops and catch those who use this break as a confirmation of a continuation of the trend. Those of use who have been around long enough know better though!

The slightly lower low on Tuesday was created with a large gap lower following steady selling in afterhours and premarket trade in the index futures to mirror the selling overseas. When a gap in the indices is stronger than average on the downside and then manages to break the 15-minute highs, the odds are quite high that the gap itself will then proceed to close relatively quickly. This is usually accomplished within the first two hours of the day. On Tuesday it did so within the first 35 minutes.

The gap closure began on Tuesday soon after the initial 15-minute of the day had passed. The bias received a welcome boost when the 10:00 ET data came out. The Institute for Supply Management (ISM) announced on Tuesday that its manufacturing index climbed unexpectedly from 49.6% in May to 50.2% in June. This put it above the 50% level. Readings under 50% are an indication of contraction in manufacturing.

Dow Jones Industrial Average ($DJI)


After the market closed the morning gap, the indices pulled back quickly into the pre-data level, but the support held at the 10:15 ET correction period from that prior breakout level and then moved steadily higher once again into 11:00 ET. As that correction period hit, the S&P 500 and Nasdaq Composite were both testing their 5-minute 200-period simple moving average resistance levels. The S&Ps and Dow Jones Industrial Average were also at their 15-minute 20 smas. The momentum shifted to a series of slightly higher highs on a 1 minute time frame to create a momentum reversal leading into an extremely rapid decline mid-day.

While I had been looking for a second lower low as I mentioned yesterday, the fact that it took place in the middle of the same day as the first was not something I had been expecting heading into the session. I had suspected that it would at least hold off another day. This would have created better symmetry between the lows to assist with a strong rally into the end of the week and beginning of next without as much risk of another flush to the downside. The shift in pace compared to the immediate 10:00 data reaction and the slower continuation, however, opened the door for the drop.

S&P 500 ($SPX)


Despite being on the early side, the market gained momentum rather quickly in the afternoon following lows around 12:30 ET. The indices had been creeping higher, but at 13:45 ET they surged on news from General Motors (GM). On Friday, Ford (F) posted worse-than-expected monthly sales, leading to speculation about its rival GM. On Tuesday afternoon, however, GM announced that decline in sales for June was less severe than most analysts had expected. GM, which is one of the Dow's 30 index components, closed higher by 2.2% at $11.75.

A continuation move took place shortly after 14:30 ET and took all of the indices into new intraday highs. They hit resistance from late day highs in the S&Ps and Dow and Monday's morning highs in the Nasdaq. This extended the bulls and they pulled back to the 5-minute 20 sma ahead of the final 30 minutes of trade. Although they did manage to hold that support level, they weren't able to push through the afternoon highs. This held true in afterhours trade as well.

Nasdaq Composite ($COMPX)


The Dow closed higher on Tuesday by 32.25 points, or 0.3%, at 11,382. The intraday low on the index was 11,183. In addition to the boost from GM, American Express (AXP) also helped the index out a great deal. AXP gained 6.2% on Tuesday following an upgrade by UBS and other financials followed its lead. Lehman Brothers (LEH) rose 4.9%, while Citigroup gained 2.2%. The S&P 500 gained 4.91 points, or 0.4% on Tuesday to close at 1,284, while the Nasdaq Composite rose 11.99 points, or 0.5%, and closed at 2,304.

Volume and volatility were both quite high on Tuesday with the wicked back and forth swings on the 15-minute time frame. I am still expecting further upside from this point on the daily time frames with the 20 day sma and congestion from early last week serving as resistance. The second slightly lower low on the 60-minute time frame was still on the early side as I said before, so this actually creates more of a two-low pattern still on that time frame than the three lows I was favoring. Nevertheless, the momentum shift and additional flush lower mid-day looks like it will be enough to allow it to hold the lows anyway.

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.