Tuesday's weak stock market bias plays out post Fed

Market Snapshot for September 22, 2011 (12:32 am ET):

  • Closing Prices: DOW 11,124.84 (-283.82, -2.49%),S&P 500 1,166.76 (-35.33, -2.94%), NASDAQ 2,538.19 (-52.05, -2.01%), Nikkei 225 8,558.44 (-182.72, -2.09), DAX 5,433.80 (-137.88, -2.47%), FTSE 5,288.41 (-75.30, -1.40%)
  • OIL 84.41, GOLD 1,780.90, SILVER 39.585
  • EURO 1.3542, YEN 76.77, BRITISH POUND 1.5459, U.S. DOLLAR INDEX 78.615

Fed Fails to Provide Relief

The focus throughout Wednesday's session was the Fed's policy announcement following a two-day meeting of the FOMC. The market held up well heading into the news, but offered little action for short-term traders by holding in a trading range throughout the session until after the afternoon announcement. As I mentioned in yesterday's column, this set the stage for the bears with favor towards a late-day breakdown. This bias played off daily resistance levels such as the 50-day moving averages in the Dow Jones Industrial Average ($DJI) and S&P 500 ($SPX).

I've spent a lot of time over the years writing about what to expect following a Fed announcement and Wednesday afternoon was a strong example of the norm. Volatility spikes immediately following the news. This is the most dangerous time for market participants since stops are easily flushed. Heading into the news, my bias was in favor of the bears, but notice that the indices flushed quickly to the upside before continuing with that bias. This would have easily shaken out traders that positioned themselves short ahead of the release and used stops on the books to protect themselves from extreme losses.

Dow Jones Industrial Average (Figure 1)

With news events this strategy for entry and stop placement, which is great under normal market circumstances, is extremely hazardous. Once the news had settled, however, there was still plenty of opportunity to play with. The action I typically look for following Fed releases takes place within three waves. These tend to occur first on a 1 minute chart and then repeat on the 5 minute. The 5 minute is where most traders find the best opportunity since the action is not nearly as hectic as the immediate response.

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