The market was back and forth throughout the day on Monday. The day began with a sharp downside gap following the surprising announcement that J.P. Morgan and Chase (JPM) would be buying out Bear Stearns (BSC) for $2/share. This was a staggering 84% lower than the prior day's close. Other financial institutions were also significantly hit. Lehman Brothers (LEH) fell 19.1%, Merrill Lynch & Co. (MER) lost 5.4%, and Goldman Sachs Group. (GS) lost 3.7%. Although the market began to recover after the Federal Reserve cut its lending rate from 3.5% to 3.25%, the gap into the open was enough to still leave the indices severely oversold and favoring a move higher.

As I mention on Thursday, most extreme gaps into the open in the market will begin to close within the first 15 minutes of the day. Thursday's took a bit longer, but this was not the case with the beginning of the new week. The market climbed steadily out of the open. There was a lot of overlap in prices, but the move was still steady. The Dow Jones Industrial Average, led by a 10.32% gain in JPM, had the easiest time completing the gap closure, while the pace on the Nasdaq Composite was excruciating. Neither the S&P 500, nor the Nasdaq, were able to complete the gap closure, although they came close by testing lows of a swing into Friday's closing bell.

When the indices struck their 15 minute 20 period simple moving averages, the reaction was immediate. The market bounced off the resistance and began to move through the lower channel from the morning's upswing. The selling continued into 11:30 ET, at which point a small range formed under the 5 minute 20 sma to create a continuation pattern lower into noon. The 12:00 ET reversal period held for a few minutes, but slower selling into 12:30 helped the market begin to roll over into the early afternoon.

The 5 minute 20 period sma was initial resistance for the market with the 13:00 ET reversal period. The indices retraced off the resistance, making their way to a very slightly lower low into 13:30 ET. The channel broke quickly to the upside when it gave way and soon the 15 minute downtrend channel was also busted. Earlier congestion served as resistance in the S&Ps and Nasdaq, but the stronger Dow was almost able to hit the morning's highs, coming into the 5 minute 200 simple moving average zone.

A pullback to the 5 minute 20 sma on light volume into 14:30 ET resulted in a continuation of the mid-afternoon upside. the momentum was a bit more choppy, but it was steady, moving back into morning highs and the price resistance which accompanies such a level. It held the zone well and although the Dow ($DJI) had been up by more than 100 points on the move, the indices pulled back into the close. It ended the session up 21.16 points (+0.2%) at 11,972.25. The S&P 500 ($SPX) was not as lucky. It still posted losses of 11.54 points, (-0.9%), to close at 1,276.60. The Nasdaq Composite ($COMPX), which had the least relative strength, fell 35.48 points (-1.6%) to 2,177.01.







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.