The index futures traded higher in premarket heading into Monday with a sharp spike higher at 7:00 am ET following Bank of America's (BAC) earnings announcement. The company beat by $0.19 for a second-quarter earnings of $0.72 a share. Even though the bank reported a 41% decline in net income for the quarter, it beat Wall Street's estimates and helped further boost the financials, which had initially begun to recover early last week. BAC closed higher by 3.89% on Monday. Wells Fargo (WFC), JPMorgan (JPM) and Citibank (C) had similar reports the week before. Two more large regional banks due out on Tuesday are Wachovia Corp. (WB) and Washington Mutual Inc. (WM). The market was already extended heading into the new week as a result of that strong recovery, so it made it difficult for it to hold onto the gains past the open.

The Nasdaq Composite ($COMPX) started the intraday session at a strong resistance level from Friday's highs, creating a two-wave correction off Friday's morning lows on a 15 and 30-minute time frame. This is a traditional short setup, but the market did not turn until the 10:00 ET leading indicators data was released. The Conference Board of leading indicators slipped 0.1% in June, in line with expectations. May's reading was revised lower, however, from a 0.1% gain to a -0.2% loss. The data points towards continued economic pressure as the year unfolds and the market did not take kindly to that thought.

Dow Jones Industrial Average ($DJI)


The market found initial support when the morning's gap zone closed at about 10:30 ET. Volume was lighter than out of recent opens, which, given that it took place following a multi-day run but with strong downside pace, suggested further downside to come. It dropped off even further between 10:30-11:30 ET. The indices formed a two-wave correction off the intraday lows with the - minute 20-period simple moving average holding the upper end of the price range. Continuation patterns often form with this two-wave pullback and the declining volume again pointed towards lower prices. The breakdown triggered at about 11:30 and the market sold off solidly for another 30 minutes to mirror the initial turn lower off the morning highs.

Equal move support hit at the same time as the 12:00 ET correction period in the market. The market lacked an exhaustion move, indicating that the bulls were not eager to pick up new positions, while the bears were now willing to hold on. The market did recover to an extent with another two-wave correction. This time it lasted longer and took the form of two waves of upside as opposed to two waves within a range. The first wave brought the market into the 5-minute 20 sma in the Nasdaq and 15-minute 20 sma in the S&P 500 and Dow, while the second wave pushed the Nasdaq through the 5-minute 20 sma with a Phoenix. The S&Ps and Dow had been stronger to begin with, so they had less room to move on the continuation. All three held the earlier congestion from the first correction off morning lows into 11:30 ET as resistance.

The market resistance hit around 13:45 ET. This is not a typical correction, but the price resistance was enough to hold back further upside. The Nasdaq Composite had also hit equal move resistance on the 5-minute time frame at this point, whereby the move out of the Phoenix was comparable in both time development and price development when compared to the initial rally out of 12:00 ET.

S&P 500 ($SPX)


Action slowed down quite a bit into Monday afternoon. Volume declined even more and the market began to experience a greater degree of chop with prices on a 5-minute and 15-minute time frame overlapping to a large extent from one bar to the next. Support hit with the 15:00 ET correction period at earlier morning lows, but the S&P 500 and Dow Jones Industrial Average pushed through these to a small degree to create a 15-minute 2B pattern. This is a form of a double bottom with the second low is just slightly under the first to create a trap pattern. The typical price action resulting from such a trap is a move higher once the channel from the move into the second low breaks. This happened shortly after 15:00 ET, but the setup lacked any volume confirmation and the indices merely chopped somewhat higher into the closing bell.

A lot of market participants were unwilling to hold a great deal on the short-term time frames overnight due to some rather hefty earnings announcements after the bell and ahead of Tuesday's open. Since many of these same players would have also lightened the load into the weekend, it meant that a lot of swingtraders sat out the session on Monday. This "wait and see" attitude partially contributed to the lighter action throughout the day, although the greater reason remained the strong upside exhaustion from the prior week.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) lost 28.99 points, or 0.2%, on Monday to close at 11,467.34. 21 of its 30 index components closed in negative territory. Merck & Co (MRK) led the downside after delaying their second-quarter earnings until after the bell following concerns about the effects of their cholesterol-fighting drug Vytorin. The result was a 6.24% drop in share price, while the fellow drugmaker Schering-Lough (SGP) fell 12.1%. JPMorgan (JPM) came in second with a loss of 3.42% in the Dow. American Express (AXP) followed, down 3.06% ahead of earnings. Following the bell, it reported earnings of 56 cents a share, quite a bit lower than the 83 cents per share that Wall Street had been expecting. Revenue was up 8% to 7.48 billion. On the positive side was American Intl. Group (AIG) which gained 5.82%. BAC came in second, but Caterpillar Inc. (CAT) also had a strong move of +3.3%.

The S&P 500 ($SPX) slipped a fraction of a point again to close at 1,260.00. Financials led the decliners, down 1.4%, while consumer discretionary fell 0.9%. Out of the S&Ps 10 industry groups, energy climbed 3.9%, while materials rose 1.3%. Oil prices climbed thanks to both an exhaustion move lower into the weekend which took it into price support, as well as some increased concerns as a result of a tropical storm making its way into the Gulf of Mexico. August delivery for crude oil climbed $2.16 a barrel to $131.04.

The Nasdaq Composite ($COMPX) fell 3.25 points, or 0.1%, and closed at 2,279.53. Shares of Yahoo (YHOO) fell 3.5% after shareholder Carl Icahn was chosen to sit on its board. Apple (AAPL) managed to recover from a strong love lower in the morning to squeak by with a 0.69% gain going into earnings, but the larger daily and weekly charts are in the middle of a two-wave continuation short pattern which began to form mid-June. The company didn't need a technical reason to head lower, however, once earnings came out after the bell. The session closed with AAPL trading at $166.29. It is nearly two hours after the closing bell, and AAPL is trading heavily afterhours at less than $148/share.

I am still favoring a larger correction off the daily resistance zone in the markets which began to hit late last week. The index futures are trading significantly lower following Monday's earnings news, so chances are high for a large downside gap. In such a case, if the market breaks the first 15 minute lows, then odds are higher for at least a trend morning lower, if not a trend day. On the other hand, should the market break the 15-minute highs, then the odds increase that the gap will fill. It will usually do such within the first two hours when this scenario develops. A small base favoring the direction of a 15-minute break, such as a little downside out of the open and then a base at lows ahead of a breakdown and vice versa for the long side will increase the odds of the setup.

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.