In typical Fed-day style, stocks oscillated in a non-committal range throughout the first half of the day, then shifted into whacky, volatile mode after the 2:15 pm announcement on economic policy. As widely expected, interest rates were left unchanged. However, subtle verbage implied the possibility of rates creeping slightly higher in the future. Traders initially rexhibited a positive reaction to the news, briefly sending the major indices to fresh intraday highs of 2009. But the enthusiasm was short-lived. Stocks turned tail in the final hour of trading, promptly shoving the main stock market indexes to new lows of the day. The S&P 500, up 0.7% at its peak, closed with a 1.0% loss. The Dow Jones Industrial Average fell 0.8% and the Nasdaq Composite gave up 0.7%. Small and mid-cap stocks, leaders throughout much of the recent rally, shed the most. The Russell 2000 and S&P Midcap 400 indices declined 1.2% and 1.5% respectively. All the major indices finished at the lows of their rather wide intraday ranges.

Turnover rose across the board, causing both the S&P 500 and Nasdaq Composite to register a bearish "distribution day," the first clear instance of institutional selling in weeks. Total volume in the NYSE increased 4%, while volume in the Nasdaq was 7% greater than the previous day's level. Throughout most of the day, volume was on pace to be lighter than Tuesday's levels, but the late-day selloff was accompanied by increased turnover. One day of selling amongst mutual funds, hedge funds, and other institutions is definitely not enough evidence to declare an uptrend is dead. Still, we'll be on the lookout for additional instances of higher volume selling in the coming weeks.

Yesterday morning, crude oil sold off sharply after the weekly inventory report showed a large, unexpected surplus of the sticky commodity. This had the effect of triggering substantial losses in the various oil ETFs. For starters, U.S. Oil Fund (USO) sliced through support of an uptrend line that has been in place for the past five months. USO also fell through a significant area of horizontal price support, as well as its 20 and 50-day moving averages. This is illustrated on the daily chart of USO below:



For those who like to trade the inversely correlated "short ETFs" (best-suited for short-term trading), PowerShares Crude Oil Double Short (DTO) conversely broke out above an equally long downtrend line and area of horizontal price resistance. As with USO, volume spiked to approximately double its average daily level:



Though we did not enter a short position in the crude oil commodity (mainly because we don't like the way crude oil ETFs tend to trade), the morning breakdown in oil prompted us to buy ProShares Oil and Gas UltraShort (DUG), an inversely correlated ETF comprised of a basket of individual energy stocks. A breakout above a multi-week downtrend line on the hourly chart, as well as a short-term double bottom at its lows, was the impetus for buying DUG. Immediately following the Fed announcement, the oil and gas stocks ripped higher, causing our DUG position to abruptly move lower. As such, we quickly sold half of the position to reduce our capital risk. However, late-day weakness in the broad market enabled DUG to roar back to close near its intraday high. We hold that half position going into today.

U.S. Natural Gas Fund (UNG), one of the steadiest downtrending ETFs of the past year, appears to finally be setting up for a short to intermediate-term trend reversal. After apparently exhausting the sellers earlier this month, UNG rallied back to reclaim support of its 20-day exponential moving average (EMA). For more than the past week, UNG has been holding above that 20-day EMA, and its trading range has tightened up significantly. Yesterday, UNG showed clear relative strength by rallying 2.4% higher, despite major weakness in other energy shares, as well as the broad market. This basically tells us the sellers are gone; the last of the die-hard bulls who refused to sell have finally caved in and ditched their shares of UNG. Ironic as it may sound, this changes the sentiment in UNG, and positions the ETF for a short to intermediate-term trend reversal. We bought UNG yesterday, after it gapped and held above its high of the preceding three days. With the trading range tightening up, and the 20-day EMA meeting the lows of the trading range, we believe UNG now offers a very positive reward-risk ratio on the long side. One more day of strength will propel UNG above its 50-day MA, as well as the highs of its recent range. Bullish momentum from such a move could send UNG considerably higher in a brief period of time:



Undoubtedly, yesterday afternoon's wild price action kept bulls and bears alike on their toes. The upward surge and breakout above the recent highs that immediately followed the Fed announcement sent the bears running for cover, while simultaneously reeling in the bulls. But just when a resumption of the recent bullishness seemed to be in the cards, stocks abruptly headed south, driven by institutional selling into strength. The bulls jumped ship and the bears either fretted about closing their short positions a few minutes prior, or simply re-entered them. For those who attempted to trade the afternoon session, it was probably a bit exhausting. Yet, the intraday price action was relatively typical of what is commonly observed on most Fed days. Therefore, it would be unwise to place too much emphasis on what occurred during the last ninety minutes of yesterday's session; it frequently takes several days until we see the real reaction from Fed announcements. Nevertheless, we detected a rather abrupt change of sentiment in the late afternoon. In yesterday's commentary, we warned of the possibility of a false breakout above the recent highs, due to resistance of the 20-month moving average of the S&P 500. So far, that's what appears to be happening. If bearish follow-through develops, we'll selectively consider additional short positions in ETFs with developing relative weakness (like USO), but it's still too early to back up the truck on the short side.

Open ETF positions:

Long - DGP, GDX, DBB, UNG
Short - DUG (an inveresely correlated "short ETF" we're long)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.