Morning Gains Eroded by Fed Announcement

Morning Gains Eroded by Fed 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! Wednesday was a fairly typical Fed day for the market. The session began on strength with a gap higher into the opening bell following a steady premarket uptrend. The indices then congested for about 90 minutes beginning around 8:30 am ET. The average Fed day will show morning strength. Sometimes it's in the form of a gap, while at other times it will stem from buying following the bell. In this case it was both.

The bulls received another boost at 10:00 am ET. The ISM nonmanufacturing index came in at 50.6% in September. This was the second month of expansion following 11 months of contraction, although the reading was less than the 51.5% economists had been expecting. The reaction was still a sharp continuation higher that easily gave the Dow triple digit gains.

Dow Jones Industrial Average ($DJI)


Merely performing well in the morning, however, is not enough to guarantee gains on a Fed day. The slowdown began on the early side on Wednesday with buying abating by 10:30 am ET. Volume dropped off and the market began to congest. This will often happen a little later in the morning on a Fed day, but it is still normal heading into the middle portion of the session. The extended rally out of the open exhausted the markets and the index futures ran into strong resistance between 10:15 and 10:30 ET. The morning highs corresponded with the 30 minute 200 sma in the Dow, as well as Friday's opening level. From that point up until the 14:15 ET Fed rates announcement the market pulled back very gradually with volume declining throughout the correction.

When the Federal Reserve did announce its interest rate decision, it wasn't surprising that they chose to leave the key rate target near zero. The corresponding policy statement also did not suggest any imminent change in this policy. The result was that the market sold the news.

The reaction to the Fed. news came in three waves. At first this was on a 1 minute time frame. This was then repeated on a larger scale on the 5 minute time frame. All in all, it played out perfectly according to what I discussed in yesterday's column. The initial wave of selling was followed by a correction, which in this case was indeed stronger than the initial wave of selling. The market then returned the bias originally resulting from the news. This third wave led the market lower throughout the final hour of trade. The indices found support into the close with the 5 minute 200 period simple moving averages and the upper end of Tuesday's trading range.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) rose 30.23 points, or 0.31%, on Wednesday to close at 9,802.14. Health care stocks were the best-performers for the day. They were once again in the news on the expectation that health care reform is likely to take a lot longer than "promised". Merck (MRK) posted the strongest gain in the Dow. It rose 6.43%. Microsoft (MSFT) was the second-best performer in the Dow. It rose 1.93%.

Meanwhile, the S&P 500 ($SPX) rose 1.09 points, or 0.10%, and closed at 1,046.50. 2/3 of the 6 top stocks in the S&P 500 were in health care. The worst performers were in transportation and the airlines. These losses coincided with higher oil prices. Crude oil futures once again topped $80 a barrel. They hit highs of $81.06 in the morning following a smaller-than-expected supply of domestic crude and gasoline, but they ended the session at $80.15 a barrel. Gold was also on the rise on Wednesday. It hit a record high of $1,095 an ounce before closing at $1,087.3.

The Nasdaq Composite ($COMPX) fell 1.80 points, or 0.09%, and it closed at 2,055.52 on Wednesday. One of the stand-outs in the Nasdaq was once again Garmin Ltd. (GRMN). It fell 14.55% despite posting better-than-expected third-quarter profits. Just two weeks ago GRMN was closing in on $40 a share, but it ended the session on Wednesday at $26.84 a share. Last week Google (GOOG) announced that it would be moving into the navigation market, creating strong competition that sent GRMN reeling.

Nasdaq Composite ($COMPX)


On Thursday the morning focus for the market will be on the Labor Department's monthly unemployment and payroll employment report that comes out at 8:30 am ET. From a technical perspective, the market is favoring a trading range on the 60-minute time frame with Tuesday's lows as strong support and Wednesday's highs as resistance. Monthly time frames are still favoring a larger correction off the zone of October's highs, but the daily time frame is still dealing with support at the lower end of the daily to weekly uptrend channel. Since the market pivoted rather quickly off the low on Tuesday, it is likely to correct more gradually off the support and favor congestion over a strong rally on the 60-minute to daily time frames.