The theme song for Tuesday's stock market is Tom Petty's "

Breakdown."

As in, the breakdown of an early rally (

it's all right if you love me, it's all right if you don't

); the breakdown of optimism (

I'm not afraid of you running awayhoney, I get the feeling you won't

); and, most tellingly, the breakdown of important technical support levels (

There is no sense in pretending, your eyes give you away

).

After rallying sharply from the opening, stock proxies reversed less than 30 minutes later and, after stabilizing at midday, tumbled precipitously into the closing bell.

The

Dow Jones Industrial Average

closed down 2.1%, to 8207.55, after having traded as high as 8482.34 early on. Similarly, the

S&P 500

ended off 2%, to 873.51 vs. its earlier best of 902.68, while the

Nasdaq Composite

closed down 1.2%, to 1259.94, after having traded as high as 1298.50.

In Big Board trading, down volume was over 85% of the nearly 1.4 billion shares traded, 11% below the three-month daily average, according to Bloomberg, but well above recent holiday/anniversary depressed levels. Declining stocks bested advancers by more than 2 to 1 and new lows bested new highs 111 to 40. Down volume equaled 75% of the 1.3 billion shares exchanged in over-the-counter activity, where decliners led by nearly 2 to 1 and new 52-week lows swamped new highs 173 to 25.

Down There Again

Tuesday's closing levels left the Dow and S&P at their lowest points since early August. Technicians expressed concern that the Dow fell below its Sept. 5 intraday low of 8217.05 and that the Comp now rests just above its Sept. 5 intraday low of 1251. Additionally, the Philadelphia Stock Exchange Semiconductor Index fell 2.1%, to 263.56, a new 52-week low. As

discussed previously, some technicians fret the SOX's technical breakdown may augur similarly for major averages.

Mainly, they worried about the S&P falling below support at 875, although it remained a hair above its Sept. 5 intraday low of 870.55.

"I think tomorrow you'll have a little dip early in the a.m., if we don't hold there's going to be a big vacuum to the next level," said Timothy Heekin, director of trading at Thomas Weisel Partners in San Francisco, which is actually eyeing 865 as a crucial support level for the S&P 500. "Tomorrow is an important day."

Some traders suggested Wednesday's tone will be set by

Oracle's

(ORCL) - Get Report

first-quarter earnings report after the close. The software giant's earnings met consensus estimates but revenue came up a little shy of expectations and its shares were lower in after-hours trading. Regardless, a profit warning late Tuesday by

J.P. Morgan

(JPM) - Get Report

and subsequent credit rating downgrade by Standard & Poor's might hold sway in an already jittery market.

The market's reversal was pinned on a series of warnings and/or negative guidance from companies such as

McDonald's

(MCD) - Get Report

, which lost 12.8% and was the biggest drag on the Dow;

Kroger

(KR) - Get Report

, which slid 12.5%;

JDA Software

(JDAS)

, down 39.9%; and

D&K Healthcare Resources

(DKWD)

, which plummeted over 60%.

The Big Numbers

On the macro front, the

Federal Reserve

reported that industrial production fell 0.3% in August, the first decline since December 2001, defying expectations for a 0.2% gain. Capacity utilization fell to 76%, slightly below expectations for 76.2%.

"The industrial production number was not good -- people are getting a little nervous" about the economy, Heekin said. "We started out on a good note with the Iraq thing but deteriorated on industrial production."

For all the intense focus given to various economic numbers, some observers give the most weight to the industrial production/capacity utilization data. That's because a rebound in business spending is the key element to the economy being able to continue its recovery.

"Business investment has got to get up and running," Edward Leamer, director of the Anderson School of Business at UCLA, said in an interview late last week. "When that occurs, if consumer spending is still adequate, it'll

generate strong-enough growth to drive down unemployment," which produces another kind of virtuous cycle of spending and growth.

The combined company-specific and economic news put the kibosh on a rally that was built on tenuous foundations. Aside from positive guidance from

Microchip Technology

(MCHP) - Get Report

, which rose 10.7%, the main catalyst for the rally was Iraq's announcement that it would allow unconditional weapons inspections.

Before trading opened in the U.S., the Iraqi announcement helped spark a rally in international bourses as well as the dollar, which steadily retreated as U.S. equities unraveled. The U.S. Dollar Index settled up 0.2 to 108.81 but was well below its earlier high of 109.75.

Unwise

Traders quickly understood the folly of a rally based on Iraq's announcement. Crude futures fell 2%, to $29.08 Tuesday and a reduction in the price of oil is not a small matter for the economy. Save that, there was little "peace dividend" for Wall Street to garner from Tuesday's news, which weighed on energy-related shares such as

ExxonMobil

(XOM) - Get Report

, and thus major averages. The Amex Energy Index fell 3.3%, and the Philadelphia Stock Exchange Oil Service Index lost 3.7%.

Furthermore, the Iraq-compliance announcement only seemed to delay the inevitable.

"I think it's just prolonging what's going to happen and providing more uncertainty," said Thomas Weisel's Heekin. "Nobody trusts the Iraqis -- this is just a token thing."

The lack of trust was underscored by comments from White House spokesman Ari Fleischer, who said, "history has shown that Saddam Hussein's word cannot be taken at face value," according to wire service reports. Fleischer also expressed the president's desire for the U.N. and Congress to maintain the pressure on Baghdad. "Anything less would give Saddam Hussein more room to maneuver with the creation of weapons of mass destruction."

On a cynical note, Tuesday's geopolitical development could be viewed negatively by Wall Street, given that traders have been eagerly recalling the market's stellar performance after the Gulf War began in 1991.

"If the market is still sloppy like it is -- whenever we happen to attack, it will start to rally when we start dropping bombs; it always does," Vince Farrell, chairman of Victory Capital Management, which manages more than $70 billion, said in a recent interview when asked about prospects for war with Iraq.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.