After rolling over in Monday's session with the three indices each forming 60-minute short patterns, the selling accelerated into the next day. As I mentioned yesterday, the S&P 500 ($SPX) had fallen on Monday morning and then had a slightly lower high in the afternoon with a base along the intraday lows. It triggered a 60-minute short pattern shortly before the close. The Dow Jones Industrial Average ($DJI) and Nasdaq Composite ($COMPX) had also formed reversal patterns with double tops on the 60-minute charts. The significance was the slower momentum and volume into the second high as compared to the first highs which took place on Friday.



The initial follow-through on the 60-minute breakdowns came in the form of a rather large gap down in the overall market. Typically the extreme gaps such as this will attempt to fill in the morning, so while most of the daily setups I was seeing into the open were on the short side, I was leery to initiate much on the downside right away for fear that the indices would quickly reverse and fill the morning gap zone.

At 10:00 ET all hopes for the gap to fill were decimated by the release of the latest economic data. The consumer confidence reading for August fell from 111.9 in July to 105.0 in August, although this was still slightly above expectations. Also released was news on I/S/ home sales from the Standard & Poor. Sales prices fell 3.2% as compared to a year ago, making it the largest year-over-year decline in the 20-year history of the index. The selling did not resume right away at this point, but the market had hit support and instead of bouncing off that support, the data held down the market. This led to a low-level intraday base which was followed by a break to new lows into 10:45 ET. Volume had declined throughout the congestion and increased to confirm the breakdown once the support level gave way.



The morning breakdown continued steadily into lunch, sliding into 15-minute 200 simple moving average support in the Dow and Nasdaq. At this point the market again began to congest on lighter volume, hugging the support level into the afternoon. The 15-minute 20 sma served as resistance and it hit at approximately the 14:00 ET correction period. This also corresponded to Fed news with the release of the Aug. 7 minutes from the FOMC's policy-setting meeting. In it the Fed reiterated its focus on inflation. It is expected that the Fed will cut its fund rates by a quarter-point next month.



The afternoon combination of the low volume base at lows, the intraday resistance, the daily pivot and the Fed news kicked off a very strong continuation on the downside in the market. The indices broke lower out of the range and this selling continued into the close. There was a smaller base that began at about 14:45 ET, but the selling resumed at a faster clip again around 15:15 ET. The session ended within a few ticks of the day's lows. The Dow lost 280.28 points (-2.1%), the S&Ps fell 34.43 points (-2.3%), and the Nasdaq dropped a whopping 60.61 points (-2.4%). The financial sector was again one of the worst-hit after Merrill Lynch cut its rating on Lehman Brothers (LEH) (-6%), Bear Stearns (BSC) (-3.4%), and Citigroup (C) (-3.5%). All three were downgraded to neutral from buy. (Why on earth would anyone have wanted to buy any of these for investments in recent months? I have no idea! They are a wee bit late!)

While there is some support at the lows from the 17th and 20th, the door is now open to retesting price levels from the 25th-16th. I am not expecting an easy retest of the exact lows though. Volume was not that much stronger on Tuesday that during the upside and the last low was an extreme exhaustion move so support will tend to occur a bit above those lows, such as the opening prices from the 16th.

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.