The market action on Monday was rather hesitant. There was a great deal of overlap from bar to bar on the 5 minute time frame throughout the session, but the market still managed to post some decent gains by the end of the day, closing at highs. The Russell 2000 ($RUT) posted the strongest gains, up 13.79 points, or 2% to close at 702.39. The Dow Jones Industrial Average ($DJI) rose 176.72 points, or 1.5%. It ended the day at 12,383.9 with 27 of the Dow's 30 components up on the day. The S&P 500 ($SPX) rose 23.35 points, or 1.8%, and it closed at 1,353.97. The Nasdaq Composite ($COMPX) was the weakest link. It only managed to climb 23.71 points, or 1%. It closed at 2,349.91.

Despite the gains by the end of the session, the market did not look particularly optimistic early on. In fact, the opening price action was to the downside. The market had continued Friday's descent to complete a third wave of selling on the 15 minute time frame. This exhausted that trend move and opened the door for another reversal intraday on Monday. This reversal did not take place until the 10:15 am ET correction period. In fact, the 10:00 housing data actually extended the downside even further. Sales of new homes fell 4.7% in December, well under expectations. This marked the lowest level since February 1995. December's sales were 40.7% lower than one year earlier. Meanwhile, November sales were revised lower by 13,000. The total of new and existing home sales in the past year fell 24.6%, which is the largest 12-month drop in 26 years.



Although news from the housing front was still doom and gloom, the market nevertheless managed to bounce back. The Dow Jones Ind. Ave., S&P 500, and Russell 2k all held their 15 minute 200 period simple moving average support intraday shortly after the housing data hit. It did not take long before they began to head back into the highs of the session. Within about 15 minutes they were testing those highs and only a few minutes later they managed to break them.

The initial rally slowed once the indices had obtained those morning highs, however, and this is where the choppier trading really set in. The indices found it difficult to push through all the resistance levels from Thursday and Friday and each new high was made to a lesser degree, with three waves total on a 2 minute time frame into about 11:45 ET. They are still somewhat visible on the 5 minute charts shown here. Prior intraday highs, the 15 minute 200 sma in the case of the Nasdaq and the 200 sma in the S&Ps and Nasdaq all served as resistance as the market rounded off at those morning highs.



Over noon the indices pulled back and corrected on light volume. 15 minute 20 period simple moving averages now served as support and the buyers returned with some hesitation into the early afternoon. Upside was again choppy and slow, and the indices barely made it to new highs before attempting to turn lower into 13:30 ET. The 5 minute 20 sma, however, held, and a third wave of buying followed before the uptrend channel broke lower shortly after 14:30 ET.

The Nasdaq fell apart in the second half of the afternoon. The selling returned with a vengeance and the Nasdaq retraced into the morning congestion zone. As the S&Ps and Dow hit support once again at the 15 minute 20 sma, the Nasdaq also began to roll over. I did not expect it to recover as well as the Dow, which had a more moderate correction, but the Nasdaq still managed to regain nearly all of its afternoon losses and closed within just a few ticks of the day's highs.



In the Dow, the top performers on the day were JPMorgan Chase (JPM), which rose 4.4%, and Citigroup (C), which climbed 3.8%. McDonald's (MCD), on the other hand, fell 5.6% after solid earnings due to stagnant sales in the U.S. I must admit, I did tell my children that we don't have McDonald's here in Florida. Ok, true... we do drive by it every day, but they seem content to let me appear delusional. Did I contribute to their "stagnant sales"? Hmm... Perhaps... While I may not be a patron the establishment, I did, however, have MCD as a position trade over the past couple of years, so while I had bailed before the top last fall, it holds fond memories at least in that regard! Maybe everyone started their New Year's diet resolutions into the holidays... Who knows, but many fear that weakness in one of the Dow's big guys is just additional proof of an economic slowdown in the works. Gee... you think?

In other news, pay attention! Tuesday brings with it yet another FOMC policy announcement and expectations are for another rate cut as well. The odds favor a 25 basis point cut, but some are still holding out for a 50 basis point cut. Either way, the typical Fed day action is as follows: upside in the morning, sharp volume decline over noon, occasionally a brief pre-Fed move on light volume, and then it's the running of the bulls... as in Spain and not necessarily the market variety. Unlike in Spain, there is no set route the bulls must take when it comes to the market. Not to mention that here you have to throw in the bears for good measure. So, it's pretty much every man and woman for him or herself. On the plus side, there is a pattern amidst this chaos.

The initial post-Fed move is the most dangerous. There is typically a sharp swing in one direction, followed by a rebound and then a third move back in the initial direction. This happens within just a few minutes and the counter-swing can be larger than the first. This action is then repeated on the larger time frame with the largest of the three swings leading into a first move on a 5 minute time frame and then a counter-move and reversal again. The second move can be larger than the first and the third can be rather minor. The degree of each move varies, but the pattern is fairly consistent. I tend to wait for these larger 5 minute swings before I will jump back into the action. By that time data irregularities have had time to clear up and the volatility has calmed down to a more manageable level.

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.