Good day! The market range widened a bit on Tuesday, despite the indices remaining relatively unchanged by the end of the session. The Dow Jones Industrial Average ($DJI) fell 3.90 points, while the S&P 500 ($SPX) lost 1.76 point and the Nasdaq Composite ($COMPX) rose a mere 0.80 point. Once again I found that there were very few big names on the gainers and losers lists ahead of Wednesday's upcoming FOMC announcement at 2:15 p.m. ET. Despite the slowdown, CFC, HPQ, RIMM, ERTS, CSCO and STLD were a few of the stand-outs on the upside. Among the notable losers were the brokers, such as GS and BSC, as well as the telecoms, such as MOT, and gold, such as FCX, EGO, and GFI. The likes of WYNN and HANS also felt the pressure, closing quite a bit lower on the day.

Tuesday's session began with a sharp gap lower after a steady selloff throughout the premarket hours. This gave us the selloff I was looking for Monday afternoon, but unfortunately it was rather belated! Typically the larger-than-average gaps will tend to close in the indices, but the gap on Tuesday was borderline... on the extreme end of average. The result was a continuation lower out of the 9:45 ET reversal period and into new intraday lows as the 10:15 ET reversal period approached. Volume rose, indicating exhaustion, and the indices found price support to correspond to the reversal period at previous lows on the 15 minute Dow and S&Ps.

The momentum in the market turned around very quickly off the morning lows, making back the losses from the continuation by 11:00 ET with the Nasdaq leading the rally. It went so far as to retrace back into Monday's lows by the time that reversal period hit. At that point the market fell into a sideways trading range along the resistance from the session's highs. A pivot low within the range at the 12:00 ET reversal period held and by 13:00 all three indices were moving into new intraday highs. The ES and Dow held resistance at that point at the S&Ps 5 minute 200 simple moving average and a return to the afternoon prices from Monday in the Dow. The Nasdaq also hit its own 5 minute 200 sma at that time and closed its morning gap, but the earlier move off lows into 11:00 ET took place in two waves and since the overall momentum on the breakout into 13:00 ET was similar, the Nasdaq had more room to move and continued higher into price resistance from the previous day.

The last couple of hours of trading were pretty slow. The indices continued to make their way higher, but did so in baby steps with a great deal of overlap from one bar to the next, particularly in the S&Ps and Dow. The Nasdaq managed another smoother bull flag out of 14:00 ET, but the time it took to correct heading into that new break highs was quite a bit less than the amount of time it took for market to correct over noon, and hence it limited the upside and made it more difficult to establish a strong trend into the close. Both the Nasdaq and Dow managed to retrace into Monday's highs on Tuesday afternoon, but the S&Ps were unable to break through the price resistance from the lows of Monday's session.

On Wednesday I'll continue to use a lot more caution in my trading. Usually on a Fed day the most active trading ahead of the Fed takes place within the first hour and a trader can pick up a trade or two in that time, but as the announcement approaches the risk increases. Over noon the volume tends to continue to decline, and even though there will occasionally be some activity just prior to the announcement, this is not typical and the lighter volume can make it increasingly difficult to obtain fills at the desired times and prices. The risk remains high directly after the Fed as well, but this time it's because the volume has spiked exponentially. The market will move very quickly and it can be difficult to get orders placed correctly and it can also lead to slowing data for many traders. Even though my connection and computer are pretty fast, I'll still shut down most of my level 2 screens and time and sales ahead of the announcement and until about 5 minutes afterwards.







It is expected that the central bank will leave interest rates unchanged on Wednesday, so most of the focus will be upon the wording used in their statement. The reaction to the Fed tends to be threefold on several time frames. There are generally two sets of three waves of reaction... an initial reaction, a secondary move that reverses the initial reaction and can be stronger than the initial reaction, and then a third move back in the original post-Fed direction. This first occurs on a 1 minute time frame and then repeats on a 5 minute one.

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.