Fed Announcement Fails to Break Indices Out of Low-Level Range

Fed Announcement Fails to Break Indices Out of Low-Level Range

(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 one of the least reactive Fed days I've seen in a very long time. The Federal Open Market Committee kicked off its two-day meeting on Tuesday, which was a more active session than usual on the first day of a two-day meeting, but the market failed to maintain that level of interest heading into Wednesday's interest rate announcement.

A typical rate announcement day is met with upside in the morning, a slowdown over noon and then three strong waves of reaction following the news. The index futures had been trading lower into 4:00 am ET, but then turned higher into 7:00 am ET to allow the indices to begin the regular session relatively unchanged. Even though the market continued to push higher into the first correction period at 9:45 ET, it wasn't enough to create a larger price reversal and the market struggled throughout the morning.

Dow Jones Industrial Average ($DJI)


After hitting a new low for the session at the 10:15 ET correction period, the volume dropped off sharply. The indices fell into a very choppy trading range that lasted until the early afternoon. It is not common for the markets to offer any strong intraday trend move directly ahead of the Fed, but the Nasdaq Composite did manage to form a decent breakdown strategy out of the 13:00 ET correction period that led to a slightly lower low before pulling higher once again into the news.

The indices began to hug the 5 minute 20 period simple moving average shortly after 13:30 ET. This created a Phoenix™ buy formation, but the trigger corresponded to the Fed announcement, creating a higher risk setup. It did follow through, but traders would have had to have contended with extreme market volatility along the way.

S&P 500 ($SPX)


The follow through on the Phoenix™ created the first leg of reaction on the 5 minute time frame. This move took the indices back into morning highs in the S&P 500 and Dow Jones Industrial Average. This rally also held resistance perfectly at the 5 minute 200 sma. The Nasdaq was stronger and managed to retrace nearly all of the losses from Tuesday's fall off highs.

The second reactionary move took place heading into 15:00 ET. This created the opportunity for traders to begin to position themselves for the anticipated third move in the direction of the initial reaction. In this case it meant another wave of buying. The 5 minute 20 sma served as support and the market pushed to new intraday highs before correcting slightly off of those highs in the final 15 minutes of trade. The buying resumed at a slower pace following the closing bell until midnight.

Nasdaq Composite ($COMPX)


Financials were the day's best performers. These were followed by solid gains in both information technology and health care.

The Dow Jones Industrial Average ($DJI) ended the session on Wednesday at 10,19236.16 with a gain of 41.87 points, or 0.41%. The top performers were Boeing (BA) (+7.31%), Bank of America (BAC) (+2.84%), J.P. Morgan (JPM) (+2.32%), and Kraft (KFT) (+2.13%). The worst performers were Caterpillar (CAT) (-4.32%), Alcoa (AA) (-1.77%), United Technologies (UTX) (-1.26%), and Disney (DIS) (-1.15%). CAT's weakness came after beating bottom line estimates, but announced that it expects a dismal 2010.

The S&P 500 ($SPX) rose 5.33 points, or 0.49%, and closed at 1,097.50. Devry Inc. (DV) (+12.73%) was the best-performer in the S&P 500. It was followed by a 10.14% gain in Rockwell Automation (ROK) and an 8.26% gain in Moodys Corp. (MCO). U.S. Steel (X) was the worst performer in the S&P 500. It fell 6.07% following sharp selling on Tuesday as well.

The Nasdaq Composite ($COMPX) rose 17.68 points, or 0.80%, and it closed at 2,221.41 on Wednesday. Flextronics Intl. (FLEX) (+8.07%), Gilead (GILD) (+7.06%), Altera Corp. (ALTR) (+5.80%), and Apollo Group (APOL) (+3.67%) were the best performers in the Nasdaq-100. MIllicom Intl Cellular (MICC) (-3.12%), Foster Wheeler (FWLT) (-2.56%), and Adobe (ADBE) (-2.36%) were the worst performers in this index.

This support zone on the daily time frame at the S&P 500's and Dow's 100 day sma will continue to impact price action into the weekend. Unless news leads the way, the market is going to want to hold this level, but a strong price rally remains unlikely. The slightly lower lows on Wednesday have helped shift the momentum on the selloff, but this shift is relatively brief so far, so the market should continue to reward daytraders over swingtraders for the moment.