Another relatively quiet session ahead of today's Fed meeting caused stocks to close with mixed results. Showing indecision throughout the day, the S&P 500 lost 0.4% and the Dow Jones Industrial Average fell 0.3%. The Nasdaq Composite, however, bucked the trend by gaining 0.1%. The tech-dominant Nasdaq 100 fared even better by climbing 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices shed 0.9% and 0.7% respectively. The Nasdaq Composite finished in the upper half of its intraday range, but the rest of the indexes settled near the bottom third of their ranges.

Total volume in the NYSE rose 2% above the previous day's level, causing the S&P 500 to register a bearish "distribution day," the third such occurrence in recent weeks. Nevertheless, the slight increase in turnover kept trading below average levels. Overall volume in the Nasdaq was 2% lighter than the previous day's level. Like the closing prices of the main stock market indexes, market internals were mixed. Declining volume in the NYSE slightly exceeded advancing volume. The adv/dec volume ratio in the Nasdaq was marginally positive.

In today's announcement on economic policy from the Fed at 2:15 pm ET, most economists are expecting a modest quarter-point reduction in the Fed funds rate. What Wall Street does not agree on is whether or not the Federal Open Market Committee (FOMC) will signal an end to the string of rate cuts that began last September. Regardless of exactly what is announced, one thing is certain; the stock market's immediate reaction will be volatile.

As discussed yesterday, many of the main stock market indexes are at or near pivotal levels of resistance. The reaction to the Fed announcement should quickly cause the broad market to "make it or break it." Nevertheless, realize the market's real reaction is often not seen until several days later. The immediate "knee-jerk" reaction is often deceiving. Because the major indices are likely to be whippy this afternoon, consider avoiding the broad-based ETFs, such as the S&P SPDR (SPY) or Nasdaq 100 Index Tracking Fund (QQQQ), until the direction of their next move becomes clear.

If the Fed implies an end to the interest rate cuts, keep an eye on both the commodity-based ETFs and currency-based ETFs. A weak U.S. dollar has led to massive gains in commodities since last August, but the group could see significant selling pressure if the dollar starts to reverse, thereby creating short sale opportunities. Most likely, that will happen if rate cuts are perceived to be finished for a while. One commodity-based ETF that showed major relative weakness yesterday is the U.S. Oil Fund (USO). Falling 2.8% in just one day, it has dropped to light support of its prior near-term low. A break below that level would lead to a break of the 20-day exponential moving average, leading to at least a short-term reversal of bullish momentum. This is illustrated on the daily chart below:



With USO so close to its all-time high, it's risky to initiate a short sale and hold for a long time. However, a break of the 20-day EMA could lead to a quick, momentum-driven trade back down to support of its 50-day MA. Just be sure to observe a strict protective stop to guard against a failed breakdown that rips higher. Rather than selling short USO, one might alternatively consider buying the inversely-correlated UltraShort Oil and Gas ProShares (DUG). Moving in the opposite direction of the oil and gas stocks (not the crude oil commodity itself), it's a great way to take a bearish position on the energy sector in non-marginable cash accounts such as IRAs (which can not hold short positions).

All of the agricultural ETFs have also begun showing relative weakness and may drop even more if the rate cuts stop. Market Vectors-Agribusiness (MOO), for example, sliced through support of its 20-day EMA yesterday and is not very far from breaking support of its 50-day MA as well:



In addition to MOO, another agricultural ETF to check out is PowerShares DB Agriculture Fund (DBA). It is presently sitting at a major level of horizontal price support, but could fall sharply if it breaks down.

Currently, our only open position is the PowerShares U.S. Dollar Index Fund (UUP), which is showing a tight, bullish consolidation on its hourly chart. We expect a breakout above its recent range to follow this afternoon's Fed announcement. Most of the currency-based ETFs such as CurrencyShares Euro Trust (FXE) could move sharply lower this afternoon, but we bought UUP rather than selling short FXE. Buying UUP is being bullish on the U.S. dollar, while buying FXE is being bullish on the euro (bearish on the dollar).

Open ETF positions:

Long - UUP
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.