Early Morning Rally Deflates Following FOMC Announcement

Today's Commentary:
Note: Current contract month for the futures is now September.

Early Morning Rally Deflates Following FOMC Announcement -
Rates Unchanged and Likely to Remain So for Quite Some Time

(Note: Unless otherwise stated, the index action described below relates to the EMini 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.)
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Good day! Wednesday marked the end of a two-day meeting by the Fed, followed with a policy statement in the afternoon regarding the rate changes. The day began in nearly textbook fashion for a Fed rates day. The indices experienced strength throughout the morning, followed by a slowdown in the afternoon, and then a strong increase on interest following the news.

The market gapped strongly for the third time in the past four sessions following greater-than-expected durable goods orders, which jumped 1.8 in May. It was the third increase in four months. Most Fed days have strength in the morning, but the news certainly helped.

Dow Jones Industrial Average ($DJI)


This time when the market gapped the indices gapped higher after being stuck in congestion throughout the entire afternoon on Tuesday. The Nasdaq Composite had hit its 50 day simple moving average at Tuesday's lows and the S&Ps and Dow were basing along the 15 minute 20 sma after pulling up off the lows. Even though both of these indices still had room before they would test their next major daily support from last month's lows, the market triggered a buy setup with the upside gap.

I have spoken a great deal lately about how to trade these larger opening gaps in the indices. The trigger in Wednesday's session was fairly textbook as well. The market moved higher out of the open, fell into a very short range, and then all three of the indices broke the 15 minute highs at approximately the same time, confirming the setup between the three. Volume also increased coming out of the highs and climbed further when the 10:00 home sales data was released.

The Commerce Department stated that new-home sales for May were at an annual rate of 342,000, down 2,000 from April. Year-over-year sales are down 33% and 55% from two years ago. The supply of new homes for sale also fell. They were at 10.2 months compared to 10.4 months the previous month. Mortgage applications did climb last week from a seven-month lows, but overall things are still looking rather bleak!

S&P 500 ($SPX)


The market apparently agreed. Even through the indices initially climbed following the data, by late morning the pace was slowing. The indices rounded off at highs with a Head-and-Shoulders pattern on the 2 and 5 minute time frames. This triggered into 11:30 am ET, but the upcoming Fed announcement kept volume light. It remained so throughout the market's steady pullback mid-day. The Nasdaq held up fairly well, but the S&Ps and Dow spoke of what was yet to come. When the 2:15 news was released the market had an immediate and negative response.

The Fed left its target for the federal funds rate at 0%-0.25% on Wednesday and its discount rate at 0.5%. The Fed also indicated that it would not be raising rates for quite some time despite speculation that it may begin to do so at some point this fall. Emphasis was placed upon the weak economy versus inflation as the primary concern at present.

The indices fell strongly following the Fed and remained weak into the close, even though they recovered somewhat in the final 45 minutes of trade. The drop took the Dow into its lows from last month as a larger support level, although the S&Ps are not quite there. The bias remains bearish on the daily charts, but the daily support zone can allow the pace to shift now on the smaller 30-60 minute time frames so that we can see a larger price correction up off those lows begin by early next week. The weekly charts are still quite extended, however, so I am not feeling particularly bullish for longer term holds for swing and position trades and will not likely initiate many until we experience a correction off highs on the weekly charts. It is quite likely that the turn off this month's highs will be the kick-off for that move.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) fell 23.05 points, or 0.28%, to close at 8,299.86 on Wednesday.The Dow was again evenly balanced between the winners and the losers on this Fed day with Alcoa (AA) as the top leader. It rose 2.10%, followed by a 1.83% gain in Intel (INTC) and a 1.76% gain in DuPont. The top decliner was Boeing (BA), which fell 5.81%. It was followed by United Technologies (UTX) with a loss of 1.99%, and American Express with a loss of 1.97%.

The S&P 500 ($SPX) rose 5.84 points, or 0.65%, and closed at 900.94. Crude oil futures fell slightly from $69.24 to $68.67 a barrel.

The Nasdaq Composite ($COMPX) rose 27.42 points, or 1.55%, and it closed at 1,792.34 on Wednesday. Tech stocks were helped out thanks to decent guidance from software maker Oracle (ORCL), which rose 7%.