Good day! First off: WOW! On Wednesday we received the latest FOMC announcement regarding federal interest rates and the corresponding policy statement by the Federal Reserve. The reaction to the news was by far the most disinterested reaction I think I've ever seen. More eyes were focusing on earnings and the latest economic data than on any move made by the Fed. Even heading into the day's announcement, there was very little fanfare and even I didn't give it more than a passing mention this week.
This has been a common trend over the past year, however. Although there have been a few notable exceptions, such as with the last announced round of quantitative easing, the Fed's interest rate announcements have become quite repetitive with no real surprises. If it hadn't been for the dramatically decreased volume mid-day on Wednesday, anyone glancing at the 30-minute intraday charts wouldn't have noticed that a typically major market-moving moment had occurred on Wednesday afternoon.
The Fed reaffirmed its stance to keep interest rates at record lows and also its plans to complete the $600 billion in QE, stating that the recovery thus far has been "insufficient to bring about a significant improvement in labor market conditions." The decision was unanimous. The market's response was not. The bulls and the bears were fairly evenly matched throughout the remainder of the day.
Dow Jones Industrial Average (Figure 1)
Although the response to the Fed was minor, there was still an underlying price bias in favor of further selling. This was not as much a result of the Fed as it was the action that took place heading into the announcement. This bias began in premarket trade. After a strong rally into Tuesday's closing bell, the index futures continued to push higher, but at a much slower rate. This shift in momentum created a short bias ahead of the opening bell on Wednesday. A smaller Momentum ReversalTM within the larger momentum shift triggered a sell in the indices futures coming off 7:00 a.m. ET highs. This selloff lasted past the opening bell and into 10:00 a.m. ET. This is when the latest housing data was released.
December's new home sales data was a welcome relief for the market. New home sales on single-family homes for the final month of 2010 hit 8-month highs for an annual rate of 329,000 last month from a revised 280,000 units the month before. This was a 17.5% increase. Nevertheless, compared to 2009, sales are still down 7.6%, so the news can still be taken with a grain of salt. The bulls didn't care.
S&P 500 (Figure 2)
The market rallied sharply before running into resistance with the 10:15 ET correction period. This was the level for premarket highs in the Dow futures and an equal move resistance in the Nasdaq as compared to Monday's morning move (shown in blue). The majority of the rally took place between 10:00-10:30 a.m. ET. After an initial high, a slightly higher high formed on the 2 minute charts (also seen on the 5 minute). This created a bull trap and the market quickly took back a large chunk of the morning gains, particularly in the Dow.
Support hit around 11:30 ET. This is where we start to see more weakness come into play. Instead of another rapid reaction to support, the upside into the afternoon was substantially more gradual than the pullback off the morning highs. This slowing momentum typically results in a stronger breakdown out of the slower uptrend channel. This breakdown was attempted right after the Fed's 14:15 ET announcement, but it surprised many market players by hanging on and refusing to give way to the momentum shift.
The market continued to hold up following the closing bell as well. Instead of giving way to the pressure to sell off, the index futures fell into a trading range into midnight, which is when this column was completed. The Nasdaq is showing the best relative strength, while the Dow and S&Ps both have three solid waves of buying already established on the 30 minute, all session charts (which include pre- and post-market data.) This leaves the trend extended on the upside heading into Thursday morning.
Part of the market's ability to withstand the bearish pressure immediately following Wednesday's closing bell stemmed from strong earnings out of Qualcomm (QCOM) and Netflix (NFLX), which kept earnings data in the forefront of people's minds.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a gain of 8.25 points, or 0.07%, and closed at 11,985.44 on Wednesday. Despite the morning's upside, fewer than half of the Dow's thirty index components managed to post a gain. The leaders amongst those that did were DuPont (DD) (+2.61%), Alcoa (AA) (+2.22%), Verizon (VZ) (+1.70%), and Caterpillar (CAT) (+1.44%). The weakest percentage performers were Boeing (BA) (-3.07%), Disney (DIS) (-1.05%), Procter & Gamble (PG) (-0.88%), and Johnson & Johnson (JNJ) (-0.79%). Boeing's revenue for the past quarter failed to meet expectations.
The S&P 500 ($SPX) rose 5.45 points or 0.42%, and closed at 1,296.63. Devry Inc. (DV) (+12.62%) was the strongest percentage performer in the index. Allegheny Technologies (ATI) (+11.80%) followed DV in the winner department. The other top leaders that broke to 52-week highs on Wednesday included Rockwell Automation (+8.86%) and Halliburton Co. (HAL) (+7.96%). Xerox (X) (-7.63%), CA Inc. (CA) (-7.57%), Sara Lee (SLE) (-5.70%), and Legg Mason (LEG) (-5.22%) were the weakest percentage performers.
The Nasdaq Composite ($COMPX) ended the session higher by 20.25 points, or 0.74%, on Wednesday and it closed at 2,739.50. Gilead Sciences (GILD) (+3.93%), Joy Global (JOYG) (+3.73%), Wynn Resorts (WYNN) (+3.34%) and TEVA Pharmaceuticals (TEVA) (+3.15%) were the Nasdaq-100's top percentage gainers for the session. The weakest shares were CA Inc. (CA) (-7.57%), Staples (SPLS) (-3.07%), Altera Corp. (ALTR) (-3.01%), and Yahoo (YHOO) (-2.81%). On Tuesday afternoon Yahoo offered a guidance for the current quarter that fell short of previous forecasts.
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.