Good morning! The market plummeted on Tuesday, leading to its sharpest one-day decline in years. The Dow Jones Ind. Ave. lost more than 400 points by its close, but at one point had fallen nearly 550 points. After the Shanghai Composite ended at an all-time high, concerns arose that the government may implement measures to dampen the excitement, and the index, which tracks shares on two of China's stock exchanges, fell 8.8%. This impact spread throughout the region and leaked into our markets as well. The futures fell throughout the premarket and the early morning economic data didn't help things any. Even though existing home sales beat estimates and consumer confidence rose, concerns over growth arose due to a steeper-than-expected drop in U.S. durable goods orders in January.

Right away out of the open things looked dicey. My charting platform was feeling the strain from the increase in volume and volatility. Typically a much larger-than-average gap in the indices will attempt to close the morning of the gap, unlike in stocks where it can more easily hold and continue lower. The most notable exception to the gap fill in the indices in such a case is when the market is at lows or highs on the larger weekly and monthly charts. On Tuesday, the market made no attempt at all following the open to try to fill the gap. That was not what the bulls were hoping for. In recent months the indices have just been creeping higher and, as I mentioned a few weeks ago, that meant that it would not take much to create a panic move. This is exactly what happened on Tuesday.

The sellers continued to drive price lower throughout most of the day with panic setting in mid-afternoon as execution platforms struggled to keep up with the data streams. Trading volumes hit record levels on the New York Stock Exchange and the Dow Jones reported data transmission errors which led to even more problems. My own platforms were so bogged down that I could do little more than just sit back and watch and be glad that the only longs I still had are of the investment variety! Exhaustion finally hit with the 15:00 ET correction period, but this was one pivot trade I decided was well-worth just passing on. Who knew if I even had accurate quotes at that time or not!







By the time it was all said and done, every component of the Dow had fallen at least 1%. The Dow Jones Composite ($DJI) as a whole lost 3.3% (-416.02 points), while the S&P 500 ($SPX) fell 3.5% (-50 points), and the Nasdaq Composite ($COMPX) closed lower by 3.9% (-96.66 points). Even though the selling should slow tomorrow, it is likely that we have now seen a top here in the market and the indices are going to begin a longer correction on the weekly and monthly charts.

While perhaps a bit disappointing to many traders, I have been looking forward to a larger correction to give many of the stocks I've been eyeing on the monthly time frames a chance to pull back so that I can pick them up and more appealing levels. Unfortunately, the ideal correction time in many is going to be about 6 months, if not a bit more. Corrections into October, which is a typical reversal period on the larger time frames, would actually be nice from that stand-point. Too bad a mass correction on that scale is going to mean that the longer term holds I already have will also likely correct! As I've mentioned over the last couple of months, I've gone and taken a lot of those gains off the board since December though when the market first began to slow. I missed the highs in many cases, but Tuesday's action took back pretty much all of the gains I missed out on in one swift swoop.

On a bit of the ironic side, I went to lunch with a couple of traders on Tuesday and we were talking about the last expo and how busy it was. One of the two guys asked me, so does this mean this bull run is over? We laughed and agreed that it was probably a reasonable sign that it was close. The last time I'd seen an expo on trading so well-attended was about 6-7 years ago... just ahead of the bear market that began at that time.

I'm not going to play a guessing game here though and go massively short on the larger time frames. Although many monthly time frames are certainly extended in the short term, a lot of them just look like they need to correct on those time frames and then have plenty of more room for upside once they get a chance to take a break for a bit. The 20 to 50 period simple moving averages on the monthly time frames will give the indices that time they need. This only applies to a lot of the stronger individual stock patterns I'm watching though, such as KLAC, COP, and CCJ.

If the pace remains on the strong side throughout that correction, then what will have to happen to lead to new highs again in the indices as a whole will be for a triangle to form and a longer congestion zone on the monthly charts with a couple of moves off the upper half of the range and into support. This type of action would take about 18 months to two years to play out, much like we saw happen in the Dow in 2004-2005. I do think that the market will more quickly pull into that 20 month support. A larger range with slowing downside momentum after an initial move off support is what will end up having to happen in order to bring the bulls back around.

Economic Reports and Events This Week
Wednesday:
7:30a.m. MBA Refinancing Index. Previous: -5.4%.
8:30a.m. 4Q Preliminary GDP. Previous: +3.5%.
10:00a.m. Feb Chicago Purchasing Managers Index. Previous: 48.8.
10:00a.m. Jan New Home Sales Previous: +4.8%.
Thursday:
8:30a.m. Feb Challenger Layoffs. Previous: +15.2%.
8:30a.m. Initial Jobless Claims. Previous: -27K.
8:30a.m. Jan Personal Income. Previous: +0.5%.
8:30a.m. Jan Personal Spending. Previous: +0.7%.
10:00a.m. DJ-BTMU Business Barometer For Feb 17. Previous: -0.2%.
10:00a.m. Feb ISM Manufacturing Business Index. Previous: 49.3.
10:00a.m. Jan Construction Spending. Previous: -0.4%.
N/A Feb Auto Sales.
Friday:
10:00am. End-Feb Reuters/U Of Mich Consumer Sentiment Index. Previous: 93.3.

Key Earnings Announcements This Week
Wednesday: BRL, DLTR, WOLF, HSP, JOYG, KG, MSO, HAWK, SLXP, S, STN, VPHM, TFSM, LTD, NKTR, PETM, SONS, TRMA, UHS
Thursday: AACC, BNT, CALP, CKP, CDL, CTB, XXTI, XTEX, DISH, HLS, PLUG, BID, SHOO, VIA.B, JOBS, CBEY, CMOS, DELL, FLR, GPS, KSS, NOVL, SGMS, PAY
Friday: HRZ and METH
Note: All economic numbers and earnings reports are in lines with those compiled by Yahoo Finance and Briefing.com. Occasionally changes will occur that are made after the posting of this column. This list is not a complete list of earnings, so always double check your positions!

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.