Stocks gapped higher on the open, drifted sideways into the early afternoon, then surrendered their gains after the Fed announcement on interest rates and economic policy. The major indices finished the day near the flat line and with mixed results. As widely anticipated, Ben Bernanke and his gang said nothing new, while maintaining the key words "exceptionally low" for an "extended period." The Nasdaq advanced 0.3%, the S&P 500 eked out a 0.1% gain, and the Dow Jones Industrial Average slipped 0.1%. Small and mid-cap stocks outperformed. The Russell 2000 and S&P Midcap 400 indices rose 0.8% and 0.5% respectively. The main stock market indexes finished near their intraday lows.

Total volume in the NYSE was 1% lighter than the previous day's level, while volume in the Nasdaq ticked 4% higher. Considering it was a Fed day, turnover was relatively subdued. In both the NYSE and Nasdaq, advancing volume was just a bit greater than declining volume. As we approach the new year and upcoming holidays, trading is likely to remain on the tepid side. As choppy, indecisive price action frequently accompanies low-volume environments, it may be prudent to continue laying low, or on the sidelines altogether.

In yesterday's commentary, we said, "Since March, the Fed has pledged to keep interest rates 'exceptionally low' for an 'extended period' of time. If any part of that language is removed, there could be a sharp, knee-jerk reaction in the stock market. However, as long as those specific, key words remain in place, the market's reaction may be muted." Though stocks moved lower after the Fed announcement, despite no significant changes to verbiage on economic policy, the initial reaction was not that volatile. Nevertheless, we've learned over the years that the market's real reaction to a Fed meeting usually does not come until several days later. As such, we don't see yesterday's post-Fed decline, in and of itself, as a reason to suddenly get aggressively bearish. Overall, the S&P, Nasdaq, and Dow simply remain stuck in their five-week old trading ranges, but one must remain prepared for the potential of the major indices to make swift breakouts in either direction.

Although yesterday's sell-off from the intraday highs was not that bad, the S&P and Nasdaq futures are under considerable pressure in today's pre-market. As of 8:00 am ET, both indexes are indicated to open nearly 1% below yesterday's closing levels. One probable reason for the overnight weakness is another tumble in the price of the euro, which appears to be in dire straits (money for nothing, anyone?). This, of course, is correlating to another surge in the U.S. dollar, which has had an inverse relationship to the price of equities. Below is a forex chart of the euro vs. U.S. dollar (EURUSD), which can also be traded during regular market hours through CurrencyShares Euro Trust (FXE):



Overnight, the EURUSD broke below a key level of horizontal price support (the dashed blue line on the chart above). Since the dominant trend of the euro has clearly reversed, FXE may soon set up as a valid short entry, after the euro eventually bounces into short-term resistance. We'll continue to monitor for such an entry. But perhaps the more important point here is that something smells fundamentally wrong about the collapse of the euro over the past several weeks. Could the potential default of a European nation like Greece be causing traders to think the once unthinkable -- the potential disbandment of the euro? We don't know, and we're more concerned about the technicals. Still, the implications of such a shocking possibility is intriguing to ponder, as it would surely wreak a bit of havoc to the U.S. markets, at least in the short-term.

If the current pre-market weakness persists into the open, most of the major indices will open below their lows of the past three days, and in in the vicinity of their 20-day exponential moving averages. Given the market's recent tendency to close opening gaps at some point during the day, we would not be surprised to see a bullish reversal that enables stocks to close near the flat line. However, if the opening gap down does not reverse today, the main stock market indexes will be headed back down to test lower channel support of their five-week bases of consolidation. While the other pullbacks to the lows of the sideways channel were above the 50-day moving averages of the S&P and Dow, another test of the recent lows would also involve a test of the 50-day MAs, which have been rising steadily higher over the weeks. Though the day-to-day indecision may be challenging for swing traders who thrive on trends, the good news is the rising 20 and 50-day moving averages will soon put the major indices under the gun and likely force a breakout in either direction. When the broad market's eventual move out of the trading range comes, it should be pretty powerful because of the length of time stocks have been range-bound.

Open ETF positions:

Long - SMH
Short (including inversely correlated "short ETFs") - FAZ

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.