Market Pauses Ahead of Wednesday's FOMC Announcement

Market Pauses Ahead of Wednesday's FOMC Announcement

(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.)


Good day! The overall market was rather sedate on Tuesday with the start of the Federal Reserve's two-day interest rate meeting. Selling overseas led to a lower open, but the market held previous 15 minute lows, closing the gap within the first 30-35 minutes of the day. The remainder of the session was slow and choppy and stayed within the larger 15 minute range. The lows of the range created a rounded appearance along daily support levels, which allowed the market to close near the day's highs even though there was substantial back and forth action throughout the session.

Dow Jones Industrial Average ($DJI)


It was transportation that stood out in Tuesday's session. The Dow Jones Transportation Average closed higher by 5.28% following the news that Warren Buffet's company, Berkshire Hathaway (BRK.A, BRK.B), would be purchasing the remaining shares it did not already own of railroad operator Burlington Northern (BNI). BNI rallied nearly 28% in response.

In addition to transportation, a number of individual securities posted strong upside on Tuesday even though the overall market did not. 12:30 ET and 14:00 ET were the key time zones intraday for most gainers. At 12:30 ET the overall market broke higher after shifting pace along the intraday lows. A number of the stronger stocks such as Research in Motion (RIMM) used this move to break to new highs on the day. The indices then based under 5 minute 200 sma resistance into 14:00 ET before breaking higher. Once again, the market gainers took this as a cue to also establish strong afternoon rallies, although the momentum slowed in the final 90 minutes of trade.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) fell 17.53 points, or 0.18%, on Tuesday to close at 9,771.91. Caterpillar (CAT) was the biggest gainer, up 1.75%, followed by a 1.44% gain in Alcoa (AA), and a 1.16% gain in Bank of America (BAC). Intel (INTC) was the biggest loser. It fell 2.68%. Merck (MRK) lost 1.89% and Hewlett Packard (HPQ) fell 1.35%.

Meanwhile, the S&P 500 ($SPX) rose 2.53 points, or 0.24%, and closed at 1,045.41. Industrials were among the strongest shares on Tuesday and automakers also held up very well. Consumer staples fronted the losses. Crude oil futures rose $1.26 a barrel and closed at $79.60. Gold was also higher, hitting a record $1,084.90 an ounce.

The Nasdaq Composite ($COMPX) rose 8.12 points, or 0.40%, and it closed at 2,057.32 on Tuesday.

Nasdaq Composite ($COMPX)


The Federal Reserve will be announcing its decision on key federal funds rate on Wednesday at 14:15 ET. The FOMC is expected to leave them unchanged, but all eyes will be upon the wording of its accompanying statement regarding whether or not there is the hint of a rate increase in the near to intermediate future, which would most likely boost both the dollar and oil. This possibility can merely be implied if the statement fails to include wording such as keeping rates low for an "extended period".

On a typical fed day the market will show strength in the morning, but the volume dries up past 11:00 am ET. From time to time there will be some decent scalp-sized moves on a 5 minute time frame over noon, but the will not be accompanied by a lot of volume confirmation and will be higher risk. I will generally sit on the sidelines mid-day and even immediately following the announcement. The reason is that once the news hits the wires things tend to get a little "wonky". Prices fly by at split-second speed and even those with decent execution skills can still easily miss their price levels.

The market's reaction to the fed usually comes in three waves. There is an initial reaction, a secondary reaction that can be stronger than the first, and then a move that continues the initial one. This often takes place on a 1 minute time frame and then repeats on a larger scale on a 5 minute time frame.