A lazy session ahead of this Wednesday's Fed meeting left the main stock market indexes little changed yesterday. The S&P 500 and Dow Jones Industrial Average traded in slightly positive territory throughout most of the day, but selling pressure in the final hour of trading caused the indices to lose 0.1% and 0.2% respectively. The Nasdaq Composite eked out a gain of 0.1%. The small-cap Russell 2000 showed bullish divergence by trending higher throughout the day and finishing 0.5% higher. The S&P Midcap 400 advanced 0.2%. It was a rather uneventful session overall, as the S&P 500 oscillated in a narrow trading range of just six points. Most of the major indices settled in the bottom third of their intraday ranges.

Not surprisingly, volume in both exchanges receded. Total volume in the NYSE was 7% below the previous day's level, while volume in the Nasdaq declined 12%. Curiously, it's been nearly six weeks since trading in the NYSE exceeded 50-day average levels. Turnover in the Nasdaq registered above average levels just twice in that period. Volume will likely remain at minimal levels for at least the next day and a half, as traders and investors are not likely to make big bets on the market ahead of Wednesday afternoon's announcement on interest rates and economic policy.

Yesterday, the S&P 500 continued to toy with pivotal resistance of its February 2008 high, which we've been discussing over the past week. The broad-based index probed above the psychologically important 1,400 level intraday, but closed the session at 1,396. The S&P 500 remains the only one of the major indices still trading below resistance of its February 2008 high. As we mentioned in yesterday's commentary, the S&P 500 technically closed above its February high last Friday, but not by a wide enough margin to confirm the breakout. The inability of the index to hold above the 1,400 level yesterday created a bit more overhead supply.

Drilling down to the short-term hourly time interval, you'll notice that the S&P 500 is quickly approaching its hourly uptrend line that began with the April 1 "swing low" (the ascending blue line). The red dashed horizontal line marks exact resistance of the Feb. 1 high. The tug-of-war between the bulls and bears is about to get more interesting! Take a look at the hourly chart of the S&P 500 below:



Stocks are likely to remain in a tight holding pattern ahead of Wednesday's announcement by the Federal Open Market Committee (FOMC) at 2:15 pm ET. If they do, the S&P 500 will run into support of the hourly uptrend line shown above at about the same time as the interest rate announcement. With pivotal overhead resistance of the S&P 500 between the 1,396 to 1,400 level, and support of the hourly uptrend line just below, we should expect high volatility on Wednesday afternoon. Making it even more interesting, don't forget that the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average are all nearing resistance of their long-term weekly downtrend lines.

Frankly, there's not much to do or say until we see the market's reaction to the highly anticipated Fed meeting. We would avoid aggressive entry of new positions until then. If planning to hold existing positions through Wednesday's announcement, we would consider positioning our portfolio on both sides of the market. A full cash position is also ideal because it will enable traders to quickly take advantage of upcoming opportunities on either side of the market with a clear head.

Open ETF positions:

Long - UUP, SLV
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.