Focus Letter

Market Awaits Fed

Good morning! The market was pretty slow on Monday ahead of Tuesday's Fed meeting. Volume was only 1.36 billion shares on the Big Board and 1.87 billion on the Nasdaq. Airlines, gold stocks and transportation stocks all saw the strongest gains on the day with drug stocks and utilities posting a lot of weakness. By the close the Dow closed lower by 29.86 points at 11,250.11, while the S&P 500 lost 1.34 points to end the day at 1,301.61. The Nasdaq managed to gain 2.76 points to finish at 2,315.58.

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The Nasdaq led the way higher soon after the open, but the move was short-lived. After rallying into the prior day's highs, the Nasdaq stalled and the subsequent pullback took the S&P500 and Dow with it. Both had a harder time moving higher out of the open and were unable to break the 5 minute 20 sma, which served as resistance leading into the correction. The pace was strong as the market fell from morning highs, making a slower bounce favorable for a continuation pattern. This bear flag then led to a third wave of selling in the S&P 500 and Dow on the morning and made a larger correction to the selling over noon more likely.

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The S&P 500 and Dow both put in some slightly lower lows after resting a bit longer into 12:00 ET. This led to the formation of a 2B reversal pattern in the S&P 500. The Nasdaq, continuing to show relative strength, hugged the 5 minute 20 sma during this time, also triggering an upside move into the early afternoon as the 5 minute 20 sma broke higher. The move was brief, lasting only about an hour, but it was enough to bring the S&P 500 back into morning highs before becoming more choppy for the remainder of the day.

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The indices switched places for a bit ahead of the close with the Dow leading the way higher. As resistance hit once more with the 5 minute 200 sma intraday on the Dow and prior highs on the S&P 500 and Nasdaq, the market stalled again and pulled back slowly but surely into the close. After the initial morning selling, the volume in the market continued to decline and remained very light into the afternoon.

On Tuesday, the main economic event will be the afternoon Fed. announcement. While not perfect, a typical Fed day commences with some upside action in the morning, followed by very light and risky mid-day activity. Daytrading will be especially difficult with the announcement itself due to an influx of volume and volatility. The market will usually break one way to start with, correct to that move (sometimes to a greater extent than the prior move) and then continue in the initial direction. It appears probable that there will be another rate hike, taking the short-term rate from its current 4.5% to 4.75%. No one is anticipating any surprises.

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