On Wednesday, the initial reaction on the 5 minute time frame was in favor of the bears. A two-wave secondary reaction followed, which set up a nearly textbook short off the 5 minute 20 period moving averages in the major indices heading into the final 45 minutes of trade. This was the strongest Fed reaction we've seen in quite some time and one of the strongest of the past two years.
Lately the Fed announcement has not been as exciting as it once was, but this time around the Fed gave investors more food for thought with the additional announcement it would move to launch yet another recovery package. Dubbed "Operation Twist", this move to rebalance the Fed's portfolio consists of a $400 billion program that would focus upon selling short-term notes to purchase longer-term Treasuries. The Fed also reiterated plans to keep interest rates low into at least 2013, and emphasized the "downside risks to the economic outlook", in addition to "strains in the global financial markets."
The market should take some time on Thursday to digest the selloffs of the past two days, but use caution when approaching larger intraday and overnight positions. A slow down in the selloff afterhours from Wednesday evening into early Thursday morning leaves the door open for some upside recovery into Thursday's session, but the larger 15 minute time frames should limit such action and the overall pace will be slower than the decline. As I write this, however, there is no setup for a buy and the potential for the slower trend to continue into previous daily lows in the Dow and S&P 500.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) ended the day on Wednesday with a loss of 283.84 points, or 2.49%, and closed at 11,124.84. Hewlett Packard (HPQ) was the only component in the Dow to post a gain. It rallied 6.72% on speculation that the company's CEO, Leo Apotheker, may be removed after only 11 months on the job. The top decliners in the index were Bank of America (BAC) (-7.54%), JP Morgan Chase (JPM) (-5.92%), Caterpillar (CAT) (-5.14%), and Travelers (TRV) (-4.42%). The financials were the hardest hit following debt rating downgrades by Moodys on Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC).