The rebound spring housing should not raise up in that manner, it should remain in contact with the base of the frame. It is installed incorrectly. The mainspring needs to be removed, then remove the rebound slide and check the spring inside, is it correct and full length? With a correct spring installed re-install the rebound slide to connect up to the hammer push rod into the proper recess in the rebound spring and flush with the base of the frame. Re-install the hammer mainspring. Do not cycle the action with the mainspring installed and the side plate off.
(Are you sure this is the correct size rebound slide? Is it possibly a J frame slide?)