Volume picked up very slightly overall as compared to Tuesday, primarily in the Dow Jones Ind. Average, as the indices attempted to retake the ground they had lost in the previous session. The market had sold off quite a bit after Moody's Investors Service downgraded nearly 400 subprime residential mortgage-backed securities and the Standard & Poor's dealt a sharp blow to more than 600 of them as well.

The weakness actually continued into Wednesday morning, gapping slightly lower and then selling off again into about 10:00 ET. The drop was enough that it created an equal move on the 15 minute charts as compared to the first breakdown on Tuesday afternoon to provide a nice exhaustion move. I was able to pick up the NQ (Nasdaq Emini) at 9:56 am ET at 1985 on the 5 minute 2B when the market came back into some premarket support as it completed the 15 minute decline. Notice that this also corresponded to daily moving average support on both the Nasdaq and Dow with the 10 day simple moving average. The reversal held well and these early morning lows proved to be the lows of the day, kicking off the retracement of Tuesday's selloff.



The market bounced back quickly after 10:00 ET despite my initial concerns heading into the day that this would not be the case. It did not take long to break through the lows of the first afternoon decline on Tuesday which were established at 14:00 ET. The sharp morning rally then stalled as the market came into the congestion that was a part of the correction from initial drop on Tuesday. It was also the Nasdaq Composite's 15 minute 20 simple moving average and the Dow Jones Industrial Average's 15 minute 200 sma. This stronger pace created the odds that, instead of seeing another downtrend day, the market would be more likely to fall into a range on the 30-60 minute charts.

I tested out a small short position on the NQ at that time due to the upside exhaustion going into the 10:15 ET reversal period, but didn't have much luck with it and ended up with a gain of only a few ticks. Instead of seeing much price correction, the index fell flat along the resistance. This was not too surprising given the momentum, but usually there will be some sort of price reaction off the resistance level, so it's not very high risk to attempt such a scalp given that often in the worst cases the market ends up with this type of sideways move.

I actually would have been a bit better off if I had gone with the S&Ps (ES) or Dow (YM) since both of those pulled back a somewhat greater percent in terms of price into the 10:45 ET reversal period. This was a bit of a mistake on my part since the Nasdaq was the index with the sharpest upside move, but it's what I was still watching the most closely since I had just closed it out on the earlier reversal. It had also hit the 15 minute 20 sma resistance exactly, so it was fairly simple to identify the resistance level.



The market began to climb again going into 11:00 ET, but it lacked the earlier enthusiasm. Trading became choppy with a lot of overlap from bar to bar on the 5 and 15 minute time frames and risk slowly increased while the volume dropped off. The "mid-day doldrums" had officially begun. I hate trading within those type of market conditions, so I was in and out of the office throughout the next several hours taking care of the fun clean-up from my recent plumbing fiasco... now known as "The Great Hansen House Flood." (I figured it needed an official name =).

The market continued to display an upside bias mid-day, but without any setups that stood out throughout most of that time. There was a small scalp on the 5 minute charts at 13:30 ET with a Phoenix that broke out the mid-day range, but the indices promptly hit resistance again and fell back into 14:00 ET. This correction continued with a second wave into the 15:00 ET reversal period, which then kicked off the final intraday pivot and the last decent setup of the day.



Although it didn't quite have the same momentum as the morning rally, the indices managed to steadily make their way back into the zone of the day's highs by the closing bell. The Dow Jones Industrial Average ($DJI) rose by 0.6% (76.17 points) on the day. The S&P 500 ($SPX) also added 0.6%, or 8.6 points. The Nasdaq Composite ($COMPX) came in close with a move of +0.5% (12.6 points).

Although Bear Stearns (BSC), Lehman Brothers (LEH), and Goldman Sachs (GS) still spent the day reeling from the previous session's losses, other financials managed to recover fairly well. JP Morgan Chase (JPM) rose 1.3%, while Citigroup (C) even closed above Tuesday's intraday highs with a gain of 0.8%. It was still about 20 cents shy of Monday's close though.

On the merger front on Tuesday, Alcan (AL) made headlines on an unconfirmed story that it has begun negotiations to merge with Rio Tinto PLC (RTP). Alcan had rejected an unsolicited offer of $27 billion by Alcoa (AA) earlier in the year, but while things seem to have taken a bit more of a serious turn recently with regard to RTP, its still up in the air. AL climbed 4% on Wednesday in the U.S. market and RTP rose 2.8%.

As a whole it still seems likely that the market is going to continue to try to correct off these levels on the monthly time frame. There's a bit of strength coming in that can push it to new highs over the next week or two if earnings go well, but the time it has taken to correct thus far from the earlier rally this year is not enough to typically sustain an upside breakout at this point, so my concern is that it would roll over quickly, much like it did on the early breakout attempt intraday around 13:30 ET on Wednesday.

In the currency market the dollar continued to slide against the pound after a sharp decline on Tuesday and is near an all-time low against the euro. Many believe that this will compel the Federal Reserve to begin cutting interest rates. Currently (11:00 pm ET) the euro stands at $1.3756. I would not be surprised if we continue to see more negative news on credit ratings and this is going to keep the pressure on the dollar, even though many key Fed officials keep saying that all is "just peachy". Due to the momentum on the euro's rise against the dollar, it is not likely to retrace easily. The euro is starting to become a bit extended on the 8-hour time frame, however, so I don't think it's the best buy at this time. The pace would actually have to slow and round off at highs on that time frame though for us to see any strong correction. Otherwise a range is more plausible.

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.