Market Awaits Wednesday's Fed Announcement

Market Awaits Wednesday's 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! Sharp selling last week had left the indices oversold heading into this week, but the pace of the selling has meant that the market would favor intraday setups versus decent swing or position trade triggers. This has been proven to be the case with Tuesday's session continuing a congestion along daily support. This support can most clearly be seen in the S&P 500 and Dow Jones Industrial Average. Both have hit their 100 day simple moving averages. The Nasdaq Composite has retraced its gains to a lesser degree thanks to its stronger breakout heading into January, but still found support this week at the middle of November and December's trading range.

Dow Jones Industrial Average ($DJI)


Even though the market is forming a period of congestion on the 60-minute time frame, the session was a lot more active than you would normally expect for the first day of a two-day Fed meeting. Some of this increase was due to earnings season kicking into full gear, but the morning's economic data also played a major role. The market had remained weak going into the opening bell and clung to Friday's closing lows for the first 30 minutes of the day after selling off following the 9:00 am ET release of the S&P/Case-Shiller home price index.

The S&P/Case-Shiller home price index tracks home prices in 20 major U.S. cities. According to the report, home prices fell 0.2% in November, while October's prices were revised from "unchanged" to a decline of 0.1%. Economists had been expecting prices to rise 0.1%. On a seasonally adjusted basis, the index did rise 0.2% in November. Since November 2008 prices were down 5.3%. In the previous one-year period prices had dropped 18.2%. The market remained depressed until the 10:00 am ET consumer confidence data.

At 10:00 the Conference Board reported that its reading of U.S. consumer confidence rose for the third consecutive month in January and also beat expectations, sending it to a 16-month high of 55.9. It had hit a record-low of 25.3 11 months ago. Prior to the economic meltdown of the past several years, however, the average stood at 95. The "present situation index", which had averaged 99, rose from 20.2 last month to 25.0.

The market jumped quickly higher following the 10:00 ET data and the indices were back to testing the prior afternoon's highs by the time the 10:15 ET correction period hit. This resistance, combined with the correction period, pushed the market into a range for the next hour. Volume dropped as the indices congested at intraday highs and the markets followed up on this bullish development by breaking higher into noon.

S&P 500 ($SPX)


The trading range from the correction was not the most ideal way for a continuation pattern to form, even though it still offered a confirmation trigger into 11:30. A clear, second low did not form in the S&Ps and Dow within the trading range and this played a role in how the mid-day breakout panned out. Instead of following through with stronger-than-average upside momentum, a steady climb began. This climb kept pace with the 5 minute 20 period simple moving average. This can make it more difficult to time and hold a trade into a target zone, because when this type of trend does break lower it can wipe out all gains from a breakout in a matter of minutes.

Nevertheless, in Tuesday's session, the indices did push to afternoon target levels by continuing to climb into Friday morning's lows, which served as a strong price resistance level that hit with the 13:00 ET correction period. The market did not reverse as quickly as it could have off this level. It dropped quickly to begin with, but the 5 minute 20 sma held and created a retest of the mid-day highs. This gave the bulls a second chance to lock in gains before the stronger selloff kicked in along with the 14:00 ET correction period.

Take a look at the 5 minute time frame and you will see that when the selling did pick up, it wiped out all the breakout's gains in only a third to a half the time it took to obtain them in the first place. A gradual bounce into the 5 minute 20 sma and 15:00 ET correction period created a second wave of selling that took back the remainder of the day's gains and left the indices with a close in the lower quarter to third of the day's range.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) ended the session on Monday at 10,194.29 with a loss of 2.57 points, or 0.03%. Travelers (TRV) was the best-performer in the Dow following earnings. It rose 2.74%. Wal-Mart (WMT) followed with a gain of 1.38%, while Caterpillar (CAT) rose 1.29%. The biggest loser was J.P. Morgan (JPM), which fell1.96%. Verizon (VZ) shed 1.66%. Intel (INTC) lost 1.57%.

The S&P 500 ($SPX) fell 4.61 points, or 0.42%, and closed at 1,092.17. Tellabs (TLAB) was the best-performer in the S&P 500 with a gain of 11.69% after it announced earnings. Lexmark Intl. (LXK) posted a gain of 7.45%, while Sherwim Williams Co. (SHW) rose 6.64%, and Zions Bancorporation (ZION) rose 6.47%. United States Steel (X) was at the opposite end of the spectrum with a loss of 11.77% as it continued the selloff that began last Wednesday. As in the Dow, the financials were also among the worst-performers in the S&P 500. Regions Financial (RF) was the second-worst performer with a loss of 7.18%.

The Nasdaq Composite ($COMPX) fell 7.07 points, or 0.32%, and it closed at 2,2 on Monday. First Solar (FSLR) was the best-performer in the Nasdaq-100 with a gain of 3.05%. Flextronics Intl. (FLEX) was the worst-performer. It fell 4.92%.

On Wednesday the Fed will conclude its 2-day meeting and announce its latest interest rate decision. The rates are likely to remain unchanged, so the focus will once again be upon the accompanying policy statement for clues on if and how its current policy may shift over the course of the year.

A typical Fed-announcement day begins with strength. Volume then drops off as activity slows in the early afternoon heading into the announcement. This takes place at approximately 2:15 ET. The reactionary moves usually come in three waves and on two time frames. There is an initial reaction, a counter-move that can be stronger than the initial reaction, and then a third shift that typically turns the market back towards their initial bias. This plays out on a 1-2 minute time frame and then repeat on the first time charts whereas the first 5 minute move consists of the 3-wave sequence from the 1-2 minute charts. Use extreme caution on the smaller time frame reactions immediately following the announcement because pricing data can be unreliable and your ability to execute at a desired price level will be hindered by the spike in volatility.

In addition to earnings and economic reports, something else to keep an eye on in the coming week is a tentatively scheduled on the topic of President Obama's proposed "crackdown" on big banks and their investment practices.