The Fed spoke and the market listened! Though the major indices traded in a narrow, sideways range throughout the morning session, stocks immediately rocketed higher after the Federal Reserve Board hinted at a possible easing of economic policy going forward. The Nasdaq Composite led the way with its 2.0% gain, while the S&P 500 and Dow Jones Industrial Average notched equally impressive gains of 1.7% and 1.3% respectively. The small-cap Russell 2000 surged 1.8% higher and the S&P Midcap 400 advanced 1.4%. Each of the major indices closed near their intraday highs.

Higher turnover across the board finally confirmed the market's gains, breaking the pattern of declining volume on every "up" day. Total volume in the NYSE increased by 12%, while the Nasdaq volume came in 26% above the previous day's level. Both exchanges registered an "accumulation day" that was clearly indicative of institutional buying. Advancing volume in the NYSE blew away declining volume by a margin of 11 to 1! The Nasdaq ratio was also quite positive at nearly 7 to 1.

Fed days are a lot like earnings announcements on individual stocks, only the reaction occurs intraday instead of overnight. No matter how well one might know a company's fundamentals, the actual reaction to the quarterly earnings releases are difficult to predict. Worse is that high probability chart patterns are often ignored when a stock is reacting to big news such as earnings. Unfortunately, technical analysis also gets thrown out the window on Fed days. Despite the S&P, Nasdaq, and Dow facing a plethora of resistance levels going into the day, the aggressive post-Fed buying spree paid no attention to the technicals. Both the S&P and Nasdaq violently broke out above their 20-day MAs, 50-day MAs, and prior highs from March. The Dow was the only index that closed below its 50-day MA, although it is still well above its prior high from March 12.

With the major indices bumping into key resistance levels from a low-volume rally, we figured yesterday's Fed meeting would provide the perfect excuse for institutions to resume their selling activities. Obviously, we just plain figured wrong! We stopped out of nearly all our short positions and sustained losses in the process, but the important thing is that we simply maintained the discipline to follow our plan. This newsletter has maintained a consistent long-term record of profitability on our ETF trades since inception, but that doesn't mean there haven't been bumps along the way. Yesterday was one such bump. Although it hurt a bit, taking the bad with the good is part of the business. We also know that consistently following our plan, regardless of market conditions, is the only way to generate steady profits year after year.

Now that stocks have followed through on their reversals off the March lows, aggressive short selling is probably a bad plan of action. Conversely, it may be risky to buy heavily at current levels without first seeing if yesterday's Fed bonanza was merely an unsustainable knee-jerk reaction. If the market consolidates near yesterday's highs for the next two to three days or retraces only modestly, we will begin looking for new buying opportunities next week. If stocks can prove that yesterday's action was not just an aberration, we will certainly respect and participate in the bullishness. But until then, take it easy with new trade entries and don't attempt to quickly recover any substantial losses you might have sustained by "revenge trading."

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.