The much-desired rally which kicked off with Tuesday's Fed meeting continued into Wednesday, but the session as a whole was a more difficult one with a lot of more choppy action and trading range activity. A large chunk of the day's gains were made in the premarket following the 8:30 am ET economic data. The Labor Department reported a 0.1% decline in consumer prices last month, while the core consumer price index rose 0.2%. This core CPI excludes the costs of food and energy. Both of these numbers came in at expected levels. In other news, the Commerce Department announced that U.S. housing starts and permits fell to a 12-year low last month, which was slightly less than expected.



After Tuesday's move, it became a lot more difficult to sustain the upside momentum and, as expected, the intraday upside on Wednesday was a lot more muted. The market experienced three waves of upside on the all-sessions 5-minute time frame coming out of the premarket data. The first stalled at 9:00 ET and the second began at the open and stalled at the 9:45 ET reversal period. The market then fell into a trading range along the intraday highs and a third rally began out of the 10:45 ET reversal period. It continued into the 11:15 ET reversal period.

When a security or index has three waves of buying whereby the correction time between each wave of buying is comparable between waves 1 and 2 and 2 and 3, then the market typically cannot establish a decent 4th wave of buying without correcting for a longer period of time following that 3rd move. In Wednesday's session the indices did not even bother to form a minor 4th move and broke the trend line going into noon as they returned to the congestion zone between the 2nd and 3rd waves of upside. This support held for a bit of a bounce into the early afternoon, but then established a lower high and was quickly followed by a lower low. This established the beginning of a new trend: a downtrend.



The afternoon trend was a very sloppy one. I had a much more difficult time with Wednesday's trading because many support and resistance levels would get flushed and more easily trigger stops even when given what would typically be considered ample room to avoid such actions. I was flushed out of three positions on Wednesday by just a few ticks before they continued and hit targets, which is something I cannot recall ever happening in one day of trading for me before. It's a disadvantage of using stop orders on the books as opposed to manually managing positions. I have yet to decide which is the best option long-term. I tend to do better when manually handling stops, but it requires a lot more time and can result in a lot more significant losses when the flushes hold. Since many times a security can tease a stop level for quite some time, this also takes away from your ability to scan and look for other trades and setups which can boost your overall performance.



The afternoon downtrend continued until nearly 14:30 ET with the final push into lows gaining momentum out of the 14:00 ET reversal period. This was the sharpest decline of the day with an initial downward thrust closing the Nasdaq's gap and a secondary once only a few minutes later as the S&Ps attempted to close their own gap but didn't quite make it.

Typically a downside move such as that which took place into 14:15-14:30 ET on Wednesday will have a difficult time turning around quickly. The market did manage to return to the levels of the congestion ahead of the final downside move on the 5 minute time frame, but it took longer to regain the losses than it did to loose them in the first place. The momentum picked up a bit after a small Phoenix into 15:00 ET created a bit of a more rounded low. Once the previous 5 minute highs hit, however, the sellers returned and the market pulled somewhat lower again in the final 30 minutes of trading.

As the primary session closed on Wednesday, all three of the major indices were reporting comparable percentage gains. The Dow Jones Industrial Average ($DJI), S&P 500 ($SPX), and Nasdaq Composite ($COMPX) each posted gains of 0.6%. In the Dow this translated as a gain of 76.17 points and the index closed at 13,815.6. 24 of the 30 Dow components closed higher. Merck Co. (MRK), which was one of the top Dow stocks, gained 2%. The S&P 500 rose 9.25 points. It closed at 1,529.03. The Nasdaq Comp. gained 14.82 points. It closed at 2,666.48. Some of the other top winners on the day were Plexus Corp. (PLXS), which rose 7.8% following an upgrade by J.P. Morgan, Accredited Home Lenders Co. (LEND), which climbed 18.2% due to news of its acquisition by Lone Star for $11.75/share, LDK Solar Co (LDK), Cree Inc. (CREE), and my favorite Warnaco Group Inc. (WRNC).

I am still expecting the market to head back into the highs from July, but as I mentioned yesterday, the pace of the buying is likely to be a lot slower. So, if the buying continues on Thursday then expect some rounding off into the highs. Should the market base into the weekend instead of continuing higher on Thursday, then it will be easier for the indices to push to a higher high as opposed to stalling right at or just under the prior high.

Toni Hansen is President and Co-founder of the Bastiat Group, Inc., and runs the popular Trading From Main Street. She can be reached at Toni@tradingfrommainstreet.com.