Traders focus shifts to the Fed meeting

The S&P 500 followed up last Friday’s breakout with a lethargic day of tight, sideways consolidation. The other indices behaved in the same manner. The Nasdaq Composite, S&P Midcap 400, and Dow Jones Industrials each eked out gains of 0.1%, but the S&P 500 closed lower by the same percentage. The small-cap Russell 2000 was unchanged. It was an uneventful day overall, as the S&P 500 oscillated in a very narrow, three-point range throughout the session.

Like the previous day, turnover declined across the board. Total volume in the NYSE was 8% lighter, while volume in the Nasdaq was 10% lighter than the previous day’s level. Lower volume is common on consolidation days and indicates the bulls are taking a break, but the sellers are not stepping in either. Market internals were largely neutral yesterday as well. Because the Feds are announcing their decision on interest rates tomorrow, trading is likely to be quiet in today’s session as well. The “smart money” will likely be taking a “wait and see” approach ahead of the Fed meeting.

While both the S&P and Dow have broken out to new multi-year highs, the Nasdaq Composite continues to lag behind. The index reversed back above its 50-day moving average on May 4 and followed up with two consecutive “up” days, but there has been a general lack of momentum the entire time. This is attributed to the fact that volume has declined and been below average levels in each of the past three days of gains. The most powerful breakouts have been in sectors such as Transportation, Banking, and Utilities. Technology and Biotech stocks have lagged behind. The S&P has virtually no overhead resistance, but the Nasdaq closed yesterday right at resistance of its downtrend line from the April 20 high:

It will be interesting to see whether or not the Nasdaq breaks out above its three-week downtrend line. If it does, it could easily rally to new highs and help to confirm the strength in the other major indices. But if it doesn’t, the tech-heavy index could act as an anchor that holds the S&P down. The broad market can certainly rally without the Nasdaq in tow, but the question is for how long.

Because of the uncertainty surrounding tomorrow’s Federal Reserve Board meeting, we do not recommend entering new positions today unless you intend to only
day trade them. We have a few sectors we are stalking for potential entries, but are not interested in doing so ahead of the Fed. As such, we will wait until we see the reaction from tomorrow’s Fed meeting before providing you with new technical analysis on any sectors we are considering buying or selling short. In the meantime, we’re watching the Broker-Dealer sector ($XBD) for a potential reversal back to the lows and the Utilities ($DJU) for potential follow-through to the upside.

Open ETF positions:

Long UTH, short XLE (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)

Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (, which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit or send an e-mail to