This week has been a bit tough in the overall market so far as folks weigh in on their feelings for Wednesday's upcoming FOMC interest rates release. Monday was a narrow range day in the market and while things widened up a bit on Tuesday, trading was still lighter than in recent weeks. The market had managed to post gains on Monday, primarily due to a nice upside gap into the open, but it took back those gains and more in yesterday's session in both the Dow Jones Industrial Average and S&P 500. The Dow ($DJI) fell 77.79 points and closed at 13,792.5. The S&P 500 ($SPX) lost 9.96 points and closed at 1,531.02. The Nasdaq Composite did manage to hold onto its gains thanks to continued strength in the tech sector. It closed virtually unchanged with a loss of 0.73 point to end the session at 2,816.71.



The action so far has been pretty typical of trading leading into a Fed day. Even on the top gainers and losers lists today many of the stocks leading the momentum moves were ones which tend to have wider spreads and choppier trading intraday. Although there were still some very nice setups throughout the session, I didn't have the best of luck locating many of the top leaders in time to catch the moves and ended up doing very little throughout the day. Apple (AAPL) led the gainers with news on sales for their latest operating system, while Dryships Inc (DRYS) completely fell apart after hitting new 52-week highs just one day earlier. It lost nearly $23/share to end the day at $108.00/share. Other top gainers included GOOG, SEPR, ATHR, SKS, and GT.



The indices began the session on Tuesday on a weak note. The market had gapped down a bit into the bell, but attempted to close the gap shortly thereafter. The Nasdaq accomplished the feat, but the Dow merely based out of the open at lows, while the S&Ps barely moved higher before they again gave way to another round of selling. The decline mirrored the one in place from the gap after a slightly delayed reaction to the 10:00 ET consumer confidence data which has hit two-year lows.

The move lower out of 10:00 ET reversed off that equal move support and some congestion from the previous two days after only a couple of minutes. The S&P 500 and Dow both pulled up into the 5-minute 20-period simple moving averages for resistance at 11:00 ET, but the Nasdaq managed to make it into new intraday highs and the upper end of the range from the previous day. A gradual correction then followed as the market slid lower into noon. The volume declined further as the indices pulled up and then based into about 13:00 ET before finally gaining some upside momentum again after 13:00 ET to take the S&Ps and Dow back to morning highs and the Nasdaq to new 52-week highs in the afternoon.



The Dow and S&Ps could barely shake off the 5-minute 20 sma support as my inched higher. At the 14:00 ET reversal period the S&Ps came into resistance from Monday's afternoon lows and the indices then began to hug the lower trend line from the upside move. This lasted for about 15 minutes into 14:15 before the channel broke and the market pulled into its 5-minute 20 sma. The indices again hugged this next support for about an hour, managing a false upside breakout in the Nasdaq, before selling off strongly into the last 30-45 minutes of the day.

The late day drop took the indices into some strong price support from the prior 15-minute congestion and 15-minute 20 sma in the Nasdaq and prior lows in the S&Ps. Momentum shifted into the close and within a few hours the indices were triggering buy setups and moving higher in afterhours trading.

The upside we are seeing here in what is now the premarket is fairly typical of pre-Fed activity. The indices often move higher in the morning ahead of the announcement. Even when the market gaps down it will try to move higher off the downside gaps. There have been a lot more exceptions to this tendency in recent months, however, so it is not something I rely on completely for a morning bias. As the announcement approaches, however, volume dries up, as does the ability to locate lower risk intraday setups for trading. Noon tends to be the dividing point whereby the market begins its siesta. There is occassionally a decent directional bias during this period, but not that often.

Following the 2:15 ET FOMC announcement things become a bit crazy. It is highly advisable for most traders to just sit and wait out the initial reaction to the Fed news. There are usually 2 sets of three moves. The first is on the 1 minute time frame where there is a reaction, a counter-reaction, and then return to the bias of the initial reaction. This same set of actions then plays out again on the 5-minute time frame. The counter-move can be larger than the initial move. Support and resistance levels still hold very well on Fed days, but they can have a bit more "give" to them due to the momentum impact of such strong moves. I am looking at 1342-1342.5 for upside resistance initially, while 1530 is support in the ES (S&P 500 EMini). There is a bit of a consensus that the Fed will lower rates another 25 basis points. I am leaning a bit more heavily towards the camp that thinks they will leave the rates unchanged, but it doesn't really matter for a daytrade what the news it, but rather what the reaction itself is.

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.