The market had a bit of a tough day on Tuesday after hitting strong daily resistance at previous highs in the Dow Jones Industrial Average ($DJI) and S&P 500 ($SPX). By the end of the session the Dow had lost 148.27 points (-1.1%), while the S&P 500 fell 21.73 points (-1.4%). The Nasdaq Composite ($COMPX) dropped 30.86 points (-1.2%).

Broker/dealers were among the hardest hit on Tuesday, falling 2.9% as a whole. Lehman Brothers (LEH) lost 5%, Bear Stearns Companies Inc. (BSC) fell 4.1%, and Goldman Sachs Group Inc. (GS) lost 2.8%. All three of these had gapped somewhat lower into the open along with the rest of the market, but after falling into a trading range on the 15 minute charts they all trended steadily lower throughout the afternoon. Even though this sector was at resistance and underperforming the overall market in recent months, the fact that Wall Street's two largest credit rating agencies downgraded billions of dollars of subprime residential mortgage-backed securities was not particularly helpful.



The day really got off on a bad footing right away. The market gapped significantly lower into the open on Tuesday. In and of itself this is not necessarily an indication that the day as a whole will be a weak one. In fact, many such gaps will actually be followed by an upside trend day and nearly all of them will fill the gap in the morning and into the early afternoon. The main exceptions are when there was already an extreme gap the day before that had filled, particularly if there have been two days in a row, and when the market is at a major resistance level on the monthly time frame. The second one was the case on Tuesday, but I was still leaning towards at least the fill of the Nasdaq gap, which was the least extreme of the three indices.



In terms of equities there was not a lot on the radar out of the open since so many stocks had gapped lower, but had done so to a point that they were exhausted. With a daily pivot in play, however, it made buying the top gainers a lot higher risk than usual. This is where focusing on the futures is the way to go and after making the mistake of trying the YM (Dow) first and only making a few points, I quickly moved over to the NQ (Nasdaq) to focus on for upside.



The Dow and S&Ps barely got off the ground on Tuesday morning, but the Nasdaq rallied higher out of the 9:45 ET reversal period. Most of the gap had closed within about 30 minutes, hitting the 5 and 15 minute 20 simple moving average resistance at the 10:15 ET reversal period. After a less-than-ideal correction along that resistance into 10:45 ET the gap finally closed at about 11:15 ET and the upside momentum slowed as the 15 minute 20 sma remained strong resistance

When the 12:00 ET reversal period hit the bears began to show a desire to take over the lead. Federal Reserve Chairman Ben Bernanke spoke early in the afternoon, but the market wasn't sure at first what to make of it. With no real insight given on the central bank's interest rate plans, the bears finally took over and the momentum on the selling increased a great deal into 13:45 ET.

When the 14:00 ET reversal period hit the market took a bit of a reprieve. I had caught the NQ a few minutes earlier and the slight 2B on the 1 minute chart led to a decent bounce back into the 5 minute 20 sma resistance before the market again turned around off the highs and sold off into the close. My last trade in the futures ended up being the 14:35 pivot off the resistance. I should have held on a bit longer than I did though! The market ended the day in the zone of the intraday lows. This correction on the daily time frame still has plenty of room to continue this week, so I will be treating upside setups on just a daytrade/scalp basis at this time.

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.