Good day! Market participants appeared to enter Tuesday's session with an overwhelming sense of uncertainty. "What to do? What to do?" was a thought so powerful that it became a chant that you could practically hear iminating from your level II if you listened hard enough.
On Tuesday the Federal Open Market Committee had it's latest policy meeting. Typically a "Fed day" will offer decent opportunities for daytraders throughout the morning, followed by a decrease in activity in the latter half of the morning until after the 2:15 ET interest rate announcement and statement. This time it seemed that nobody got the memo about "decent morning activity" and the indices struggled to gain a foothold either way.
Dow Jones Industrial Average
The S&P 500 was the index with the strongest pattern development on the 5 minute time frame leading into the Fed announcement. The risk to reward ratios for the strategies, however, were not very impressive. The first trigger took place ahead of the opening bell when the S&P index futures retested the zone of Monday's closing move highs. This created some initial selling into the open, which took the index into the lower end of the premarket uptrend channel by the 9:45 a.m. ET correction period. The index hugged this support level into 11:00 a.m. ET on light volume.
By 11:15 a.m. ET the S&Ps were breaking lower. This setup is one I've dubbed an Avalanche and is the most visible on the 15 minute time frame. The action didn't quite live up to its typical namesake, but it was the strongest move the index established after the open and prior to the Fed. Another attempt to move lower triggered at the 13:00 ET correction period when the indices began a third wave lower since the premarket peak. Interestingly, due to the lesser degree of follow through on this third leg lower, the technical bias for the market was in favor of the bulls on the 5-15 minute time frame going into the Fed.
It didn't come as much of a surprise when the Fed left its target interest rate unchanged at 0.00%-0.25%. The Fed made it clear that it expected to continue to leave these rates low for an extended period. Nevertheless, the market had a strong reaction to the Fed. the statement that accompanied the Fed's decision was the market-moving material. The Fed indicated that it was prepared to step in to attempt to keep the economy moving forward. Virtually zero inflation has them concerned since its a step closer to deflation. Should deflation occur, it will be a nasty phase to break.
The price action following the Fed was ideal for daytraders. Once the market moved past the first set of reactionary moves, which show up merely as a tail on a 5 minute time frame, there were some nice continuation and reversal strategies. By the end of the day, however, prices were comparable to the pre-Fed levels.
The Dow Jones Industrial Average ($DJI) posted a gain of 7.41 points, or 0.07%, and closed at 10,761.03 on Tuesday. The gainers and losers in the Dow were fairly evenly matched by the closing bell with the gainers taking only a slight lead. The top performers were Caterpillar Inc. (CAT) (+2.19%), Hewlett-Packard (HPQ) (+1.35%), and Intel (INTC) (+1.11%). The worst performers were Alcoa (AA) (-1.85%), JP Morgan (JPM) (-1.46%), Travelers (TRV) (-1.18%), and Disney (DIS) (-1.15%).
The S&P 500 ($SPX) fell 2.93 points, or 0.26%, and closed at 1,139.78. The S&P 500 leaders included Nvidia (NVDA) (+5.42%), Baxter Inc. (BAX) (+3.63%), Vulcan Materials (VMC) (+3.14%), and Nabors Industries (NBR) (+2.54%). The weakest stocks included Owens Ill. Inc. (OI) (-6.12%), Sandisk (SNDK) (-6.06%), New York Times (NYT) (-5.57%), and Linear Tech. (LLTC) (-3.66%).
The Nasdaq Composite ($COMPX) ended the session lower by 6.48 points, or 1.74%, on Monday and it closed at 2,349.35. Nvidia (NVDA) (+5.42%) was also the top gainer in the Nasdaq-100, followed by Research In Motion (RIMM) (+4.43%), and Foster Wheeler (FWLT) (+2.44%). The biggest losers were Sandisk (SNDK) (-6.06%), Linear Tech. (LLTC) (-3.66%), and Netapp Inc. (NTAP) (-2.96%).
The price action in the Dow on Tuesday was enough to bring the index into nearly touching distance of the upper daily channel resistance I wrote about yesterday. This should be considered a very risky level to attempt to end new longer term buy positions, no matter whether they are meant as swingtrades or position trades. There is a strong bias favoring a reversal this week and heading into next whereby the rally off last month's lows will finally loose some momentum.
Note: Unless otherwise stated, the index action described in this article relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.
Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.