The Fed, in yesterday's announcement on economic policy, vowed to keep rates low "for an extended period," helping stocks score solid gains across the board. The major indices actually rallied ahead of the afternoon news, showed a bit of volatility immediately thereafter, then cruised higher into the close. The S&P 500 climbed 0.8%, the Nasdaq Composite 0.7%, and the Dow Jones Industrial Average 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 0.8% and 1.0% respectively. All the main stock market indexes closed near their intraday highs.

Although the outcome of yesterday's Fed announcement was widely anticipated, traders found the news a good reason to jump back into the markets, enabling turnover to spike higher in both exchanges. Total volume in the NYSE soared 52% above the previous day's level. Trading in the Nasdaq ticked 12% higher. As volume levels moved back above average, yesterday's higher volume gains enabled both the S&P and Nasdaq to register a bullish "accumulation day." The buying amongst mutual funds, hedge funds, and other institutions helped solidify the stock market's overall positive price to volume relationship of recent weeks. Market internals also improved substantially. In the NYSE, advancing volume exceeded declining volume by a wide margin of 5 to 1. The Nasdaq adv/dec volume ratio was positive by 2 to 1.

Yesterday, the S&P 500 joined the Russell 2000, S&P Midcap 400, and both Nasdaq indices by convincingly rallying above its January 2010 high, closing at a fresh 52-week high. Only the Dow remains below resistance of its January 2010 high, albeit by a narrow margin of just 0.5%. With all but one of the major indices trading in new 52-week high territory, what exactly does this mean for the overall market outlook? The answer depends on one's time horizon.

In the short-term, stocks remain a bit too extended beyond their 20-day exponential moving averages to achieve a firmly positive reward-risk ratio with most new trade entries. Nevertheless, we hesitate to use the word "overbought," as markets often continue to become much more "overbought" before eventually correcting. In the intermediate-term, there's been a positive change of trend, as the major indices have now re-established themselves back into intermediate-term uptrends. But what about the long-term view of the S&P 500? Perhaps surprisingly, nothing has really changed with the most recent move to new highs. The weekly chart of the S&P 500 below illustrates why:



On the long-term chart of the S&P 500 above, we've applied Fibonacci retracement lines, as measured from the October 2007 peak to the March 2009 low. Basically, the most recent push to new 52-week highs technically had no bearing on the long-term chart of the S&P 500 because major resistance of the 61.8% Fibonacci retracement level (at the 1,228 area) still remains. Bullish momentum could now carry the S&P to the 1,228 level, but one should pay close attention to price action at that time because the 61.8% level is often where strong bounces finally reverse. But if the S&P convincingly breaks out above the 1,228 area, it would have a positive bearing on the long-term trend. Such action would make it feasible for the index to rally all the way back to its October 2007 highs. However, with the S&P approximately 6% below the 1,228 area, it's too early to discuss such a scenario right now.

Similar to the S&P 500, the blue-chip Dow Jones Industrial Average has also retraced more than 50% of its losses from the October 2007 peak to March 2009 low, but has not yet pierced through the pivotal 61.8% level. However, the most encouraging situation for the long-term view of the broad market is that the Nasdaq Composite has already exceeded the 61.8% Fibonacci retracement level, having already recovered approximately 70% of its long-term, peak to trough loss. The same is true of the Russell 2000 and S&P Midcap 400 indices. This is a positive sign, as small and mid-cap stocks typically exhibit leadership during healthy markets.

Overall market sentiment continues to improve, as does the technical picture. Whether or not one believes the market is currently "overbought," recent price action and volume patterns have not yet given traders any good reasons to be bearish. Therefore, the only logical course of action is to continue positioning one's portfolio in the path of least resistance ("up"). Nevertheless, traders who are presently sidelined may find it most beneficial to continue exercising patience to at least wait for a small retracement, or a substantial consolidation in the market, before initiating new long positions. The real market reaction to Fed meetings is typically not seen until one or two days after the announcement. Often, the reaction is opposite of the initial, knee-jerk reaction. Just something to keep in the back of your mind over the next few days.

Open ETF positions:

Long - KCE, GDX
Short (including inversely correlated "short ETFs") - (none)

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.