The market experienced another day of strong losses on Monday to kick off the new trading week. This followed through on the daily continuation short setup that had been forming at the end of last week and into this. The odds were high for a trend day on the downside on Monday and the market did not disappoint. The day began with a moderate downside gap and continued lower into the closing bell, ending the session at the day's lows.

The Dow Jones Industrial Average ($DJI) shed another 172.65 points, or 1.3%, on Monday, closing at 13,167.2. Caterpillar Inc. (CAT) was one of the largest decliners, falling 3% after a downgrade by Morgan Stanley. Only a couple of the Dow's 30 components managed to post gains. The S&P 500 ($SPX) and Nasdaq Composite ($COMPX) also fell throughout the day. The S&P 500 lost 22.05 points, or 1.5%, and closed at 1,445.9. The Nasdaq, bogged down by heavy losses in technology, landed lower by 61.28 points, or 2.3%. It closed at 2,574.46. Research In Motion Ltd. (RIMM) fell 5.4% on the day, while Micron Technology Inc. (MU) lost 5.7%. Other top losers included, AAPL, DRYS, BIDU, AMZN, GOOG, FSLR, EEM, NOV, IR, and FCX.



Market data and news throughout the session on Monday helped add fuel to the fire to continue to push prices lower, although the volume on the day was not substantial and lacked strong panic or urgency. This suggests that it can easily continue into Tuesday. In fact, the selloff was rather orderly. Ahead of the open the New York Federal Reserve Bank reported a slowdown in factory growth in December. Meanwhile, the Commerce Department pointed to a narrowing current-account deficit in the third quarter. Later on in the day Moody's warned of downgrades in leading bond insurers and former Fed-chairman, Alan Greenspan, warned of a 50/50 chance of a recession. President Bush also spoke of economic challenges during a speech in Fredericksburg, VA. All-in-all, not very hopeful news to a market already on edge.



Following the opening gap in the indices, the market inched lower with a great deal of overlap from one bar to the next, particularly in the Dow and S&Ps. The Nasdaq experienced the most steady selling, so while the slower pace of the S&Ps and Dow actually contributed to a buy trigger around 10:15 am ET on an upside channel break on the 5 minute time frame, the Nasdaq merely fell into a trading range along the day's lows to form a bear flag while the other indices advanced. Both the S&Ps and Dow had their strongest upside on the initial break of the trend channel from the first 45 minutes of the day. They then had a more difficult time breaking to new highs. Finally, after a third attempt, the ascending wedge formation triggered a short setup, which I took at 1473.5 in the ES. This corresponded to the bear flag trigger in the Nasdaq and the indices fell steadily into noon.



The morning lows served as support for both the Dow and S&Ps, while the Nasdaq completed a move equal to the initial decline out of the open, leading to another form of price support which hit just prior to the 12:00 ET correction period. The support zones held in all three indices and the market pulled up very slowly into the 15 minute 20 period simple moving average as volume declined, creating another short setup in the form of a bear flag.

The market turned lower again right at the 13:00 ET reversal period and the strongest wave of intraday selling began. It formed a continuation pattern which took it to lows at the 14:00 ET reversal period. The momentum on this continuation was slower in the Dow and S&Ps, however, and a channel break created a small buy setup on the 5 minute time frame, although the initial resistance zone from previous highs held, along with the 5 minute 20 sma. The selling then continued at a choppier rate into the final 90 minutes of trading. As I mentioned earlier, further downside into Tuesday or even Wednesday is going to be in line with previous price moves of this sort, however, we should expect to see more overlap intraday in prices and lighter volume heading into the holiday.

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.