It was quite a crazy session on Wednesday after Tuesday's massive selloff left investors and traders alike wondering just which door to run to. The indices did manage to recover some of Tuesday's losses as we expected, but it was not at all easy, and the S&P 500 and Dow Jones Ind. Average even managed to establish lower intraday lows. This took place after the indices moved higher in the premarket and opened into the 15 minute 200 simple moving average zone intraday, as well as price resistance from Tuesday's morning lows. With an extreme gap now in play, the odds were strong that the gap would attempt to fill. Some initial hesitation for the first 30 minutes of the session led to a better test of the 15 minute 20 sma zone, but volume declined on this slight upside move and the market turned around quickly into 10:00 ET on the heels of June's existing home sales data.

Last month the real estate market experienced a sharp drop in the sales of existing homes. The 3.8% decline marks the lowest sales pace in nearly 5 years as more and more home sellers are pulling their listings. Even with this decline, the supply of homes on the market remains at a 15-year high with 8.8 months' worth of sales (or 16 months and a price reduction of 18% if you want to just count how long my completely renovated home in southern Florida has been listed! Ugh!). Countrywide Financial Corp. (CFC), which is the nation's largest mortgage lender, and who reported a 33% drop in quarterly profits on Tuesday, fell another 1.6% on Wednesday.

All in all though, home prices are still out of reach for many would-be home owners, and unfortunately I am in complete agreement with many who feel that this slump is still quite a ways away from the bottom. I would not be at all surprised to still be stuck here for the next year given the massive overdevelopment of new homes in my area and the insane deals these developers are making in a feeble attempt to unload their inventory. New home sales data for June is due out on Thursday.



Ok, ok, since I still haven't quite convinced you, I suppose I better get back to telling you about the rest of the market action on Wednesday...

Once that 10:00 ET selling hit, there was no turning back until the market had made its way back into Tuesday's lows. The major indices didn't even stall enough at 5 minute 20 sma support to form more than a cursory continuation pattern with an inside range bar and then a return of the bulls at 10:15 ET. The momentum increase somewhat as the previous lows approached and finally formed an exhaustion move as the 10:45 ET reversal period hit. This corresponded nicely to the previous day's lows in the Nasdaq Composite, but was a slightly lower low in the Dow and S&Ps. The result was a 2B reversal in those indices and a double bottom in the Nasdaq which eventually took the market back to the 15 minute 20 sma resistance that had held earlier in the session.



After heavy volume throughout the morning, the volume finally died down a bit mid-day. After hitting the 15 minute 20 sma, the momentum within the indices also began to turn back over. The market pulled back off the resistance into noon and then hit the 15 minute 20 sma again around 12:30 ET, but this time at a much more gradual pace than before. This upside into the resistance occurred on the lightest volume of the session so far, which indicated a lack of truly dedicated buyers and after a small pullback into 13:00 ET, the selling increased for a second time on the day going into 13:30 ET.

As in the morning, this low held the previous one in the Nasdaq Composite, but the Dow once again saw a slightly lower low, creating a second 2B low in that index. The slight flush into this low, but on lesser volume than into 10:45 ET, showed us that while the bears were still unsure about buying, they recognized the support and were hesitant to break it. After a brief pause when they contemplated the level, the market popped quickly back to the 5 minute 20 sma resistance zone. This pushed the indices into a sloppy range along that level into the 14:00 ET correction period, at which point the resistance broke and took the indices back into the 15 minute 20 sma for the third time.

Typically a third test of support or resistance is the one most likely to break. The market had not broken the third test of lows because in the Dow each low was slightly lower than the last, hence creating more of a rounded appearance. Each test of lows was also at a more gradual pace than before, leaving less momentum to push through the support. As a result, in this case the third test held. On the upside, however, the resistance became closer and closer each time, so the market had less and less work to do to make it into that level and the slowing downside momentum meant that more steam was available for the bulls. The indices broke through this 15 minute 20 sma resistance when the 15:00 ET correction period hit. This happened after it hugged it for about half an hour beginning just before 14:30 ET with lighter volume throughout that congestion.

The indices rallied sharply out of 15:00 ET and within only a few minutes they were all the way back into the congestion from the opening prices. This stalled the buyers, but the pace was so strong that it was difficult for the market to simply turn back around. Instead, the 5 minute 20 sma support held into the close, even though this close still left the market looking weaker on the 5 minute charts by hugging that 5 minute 20 sma instead of bouncing right back off it.



Although I had a slew of stocks on my watch list which gapped strongly into the open on Wednesday, many of the gaps were too extreme for decent momentum continuation moves and they spent the day stuck in choppy trading. On the upside these included CB, PLT, AMZN, EGLE, and PRAI. Chubb Corp. (CB) gapped on earnings that were up 19% from the previous year, adding 6% by the end of the day. In Plantronic Inc. (PLT) its rally was another earnings move in which it gained 11.3%. Amazon.com (AMZN) made headlines when it reported earnings that more than tripled in the second quarter and sent the stock higher by 24.4% into the closing bell. Eagle Bulk Shipping Inc. (EGLE) rallied 15.4%, all of it with the morning gap, when it announced plans to acquire a fleet of ships from a Greek company. PRA International (PRAI), on the other hand, saw its 7.8% rally resulting from plans to be taken private.

On the downside the extreme gaps which saw little action past the open were SKX, PNRA, NTRI, and JOYG. Sketchers USA Inc. (SKX) shares fell 21.4% after announcing a 27% increase in operating expenses with its earning release. Panera Bread Co. (PNRA) also fell victim to rising costs. In the past year, even though revenue rose 28%, costs increased 33%. Another stock tumbling on earnings news was NutriSystem Inc. (NTRI), which fell 10.8%. Ironically, it actually beat earnings expectations of about 85 cents a share with earnings per share of 96 cents. Joy Global Inc. (JOYG) lost 11.9% when it cuts its fiscal 2007 financial forecast.

In the overall market, the Dow Jones Industrial Average ($DJI) gained 68 points to end the day at 13,785 on Wednesday. It was led by Boeing (BA), which had rallied 3.3% into the open on better-than-expected earnings. The S&P 500 ($SPX) rose 7.05 points, closing at 1,518. The Nasdaq Composite ($COMPX) climbed 8.31 points. It closed at 2,648.

Despite the somewhat higher prices on Wednesday, the Dow and Nasdaq still have room before hitting the larger 50 day simple moving average support. In the S&P 500 the next major support level is the 100 day sma, which is slightly above June's lows. The market still has room to bounce to its 60 minute 20 sma resistance, but the larger daily support remains a magnet for decent potential to hit still at some point this week.

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.