As anticipated, yesterday was another lifeless session ahead of this afternoon's Fed meeting on interest rates. Like the previous day, the S&P 500 drifted sideways within a tight three-point range, but this time the other indices showed moderate price divergence. Although the S&P 500 finished the day unchanged, the Dow Jones Industrial Average advanced 0.5% and the Nasdaq Composite fell 0.3%. Continued strength in the transportation sector helped lead the Dow higher, while a quarterly profit warning from Dell Computer weighed on the tech sectors that dominate the Nasdaq. The small-cap Russell 2000 was off 0.1%, while the S&P Midcap 400 lost 0.2%.

Although volume in the NYSE declined by 2%, total volume in the Nasdaq was 8% higher than the previous day's level. Because the Nasdaq closed lower, but on higher volume, this means the index registered a bearish "distribution day" yesterday. It was the fifth such day of institutional selling within the past four weeks. A strong and healthy market can usually absorb two or three distribution days in this time period, but an extra degree of caution is required whenever the "distribution day" count exceeds four. The one positive, however, is that market internals were not that bad. In the Nasdaq, declining volume exceeded advancing volume, but by less than a 2 to 1 ratio. In the NYSE, advancing volume marginally beat declining volume.

As you might have expected, yesterday's action did not change the current technical picture of the broad market. The Nasdaq's loss caused the index to remain below resistance of its three-week downtrend line that we illustrated yesterday. Conversely, the Dow continued to power higher and is now only 110 points away from its all-time high. Looking purely at price action, the daily chart of the S&P 500 looks pretty good. The index broke out above its trading range on May 5, then followed with two consecutive days of narrow-range consolidation near the high:

In and of itself, this type of pattern is bullish and usually leads to new highs. However, one big factor that could disrupt the anticipated follow-through is the reaction to today's Fed meeting. At 2:15 pm EST, the Federal Reserve Board will announce their decision on interest rates and provide a future outlook as well. While it is widely anticipated the Feds will raise interest rates for the sixteenth consecutive time, economists have mixed opinions on whether they will revise their policy statement for future rate increases. Whatever the outcome, remember the only thing that matters is the market's reaction to the announcement.

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.