As we head into the second day of this two-day Fed meeting the market is still tacking on some subtle gains. In Tuesday's session the Dow Jones Industrial Average ($DJI) gained 96.41 points, or 0.78%, and closed at 12,480.3. The S&P 500 ($SPX) gained 8.34 points, or 0.62%, and closed at 1,362.30. The Russell 2000 ($RUT) gained 2.81 points, or 0.4%, and closed at 705.2. The weaker Nasdaq Composite ($COMPX) added 8.15 points, or 0.35%. It closed at 2,358.06. Telecoms were among the best performers, while chip stocks closed lower for the most part.



As the Fed announcement draws near, the market volume has dropped dramatically compared to recent trade. It had peaked on the 23rd and has been declining steadily since the recent lows. Tuesday's volume came close to the lowest of the month. Volume on the New York Stock Exchange on Tuesday approached 1.6 billion with the gainers outpacing the losers by 2:1. On the Nasdaq, nearly 2.2 billions shares traded hands with advancers leading decliners by 8 to 5.

Out of the open on Tuesday, the market was trading higher, but those gains did not last long. The session began at resistance from prior 15-minute highs and within about 15 minutes the selling began. The gap closed quickly into 10:00 am ET. Although the Conference Board's consumer conference index fell in January, taking back a huge chuck of the previous month's gains, the market actually began to move higher following the data. The preliminary January consumer confidence index had dropped to 87.9 from 90.6 in December, which was short of the 88.6 estimate. This came very close to the 12-month lows.



After coming into support at 10 am ET, the market popped, but the buying did not last long and the indices did not immediately retake the highs. Instead, the buying stalled into 10:30 am ET and the market corrected again into 11:00 am ET. A second attempt to rally failed to live up to the momentum of the first, although the S&P 500 managed to return to highs and the Dow pushed through them to retest the zone of Friday's highs. The slower momentum continued to slow as the market moved into noon. When the 12:00 ET correction period hit the bears returned, particularly in the Nasdaq.

The market dropped for about 30 minutes into the early afternoon before running into support again. Although volume declined and the market based along lows, it just never was able to obtain any volume confirmation of a downside bias. Three tests of mid-day lows failed to break and the market pulled higher out of the 14:00 ET reversal period. A smaller congestion around 14:30 ET then gave way to buying into 15:00 ET. The S&Ps made it back to highs, where it hit price resistance, while the Dow managed new intraday highs but failed to surpass the resistance from Friday's highs. The Nasdaq, ever the dog, could not even break the late morning congestion. All of these resistance levels held and the market again chopped around into the close. All in all, the day was very indecisive as investors and short term traders alike tried to get a feel for what as to come in the following day's Fed announcement.



As I mentioned yesterday, the market is assuming a 25 basis point cut, but a number of folks are still looking for 50. The market tends to move higher in the morning, but Tuesday's afternoon lacked a strong bias. We are seeing more mid-day moves on a Fed day than is typical, but volume tends to dry up after about 11:00 am ET. Once the Fed announcement hits the wires all bets are off and the market becomes very volatile. Typically three waves follow: an initial move, a secondary move which can be stronger than the first and then a third in the direction of the initial move. These tend to form first on a 1 minute and then on the 5. Use caution in the first 5-minute swing since this is when quotes tend to be off by the greatest degree for many online traders and risk is at its highest. I will likely wrap up morning trading myself around 11:00 am ET and pick it up again following the first move on the 5-minute charts after the Fed.

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.