Good morning! The day began on Monday with a lot of hesitation. The market moved higher after some initial weakness, but the momentum was gradual and held the lower end of the trend channel from the prior two days. It was obvious that the market was waiting for something and that something came in the form of the 10:00 new home sales data, which fell to a 7-year low, sending shock-waves through the market. The drop was 3.9%. The inventory of unsold homes rose 1.5%, the largest inventory compared to sales since January 1991. The market did not take the news well and quickly began to plummet.

Once the lower trend channel broke from the previous two trading days, there was nothing left to provide nearby support. The indices went into free-fall mode and the selling continued into 10:30 ET after only a brief stall into the 10:15 ET correction period. The Nasdaq Composite found strong support at 10:30 though from prior highs and the 10 day sma. The indices slowly reversed off these lows, but the extreme momentum of the selloff was too much to allow for any rapid recovery. Instead it took a series of small and irregular bull flags to take back the ground lost as a result of the housing data.

The pace on each of the upside moves was actually fairly decent after increasing with the 11:15 correction period, but they were each very brief and then followed by congestion into the 5 minute 20 sma. The longest of these correction occurred after the indices ran into the 15 minute 20 sma resistance. This stalled the rally until 13:30 ET when the buyers again returned. Since the corrections each took different time spans to form, the market didn't hold with its typical three wave trend development. Instead the indices were drawn back into the congestion from last Thursday and Friday, which was a very strong price resistance level. That zone hit in the last hour of trading and held that zone into the close, ending the day within a few ticks of the highs of the session.







After the wild ride, the Dow Jones Industrial Average ($DJI) closed lower by 11.94 points, while the S&P 500 ($SPX) rose 1.39 points and the Nasdaq Composite ($COMPX) gained 6.70 points. Dell and EBAY helped a lot with the Nasdaq, gaining 3.5% and 4.4% respectively after upbeat news from Goldman Sachs. The Dow on the other hand was weighed down by losses in HON, HD, MMM, and VZ. Due to the increase in pace into the close, a more gradual correction off those higher would create an upside continuation pattern that can then easily retake the zone of last month's highs, which will serve as strong price resistance. Since the overall pace, however, was slower than the morning descent, there is still the risk that the range from the last couple of days holds.

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.