Stocks attempted to follow-through on the previous day's bounce, but a moderately negative reaction from the afternoon Fed announcement on interest rates reversed the morning rally. As widely expected, the Federal Reserve Board left interest rates unchanged, but maintained that inflationary risks are still a reality. The broad market initially spiked to new intraday highs as a knee-jerk reaction, but sentiment turned sour in the final hour of trading. The Nasdaq surrendered an early gain of 0.7% to close only 0.1% higher. The small-cap Russell 2000 and S&P Midcap 400 indices both advanced 0.1% as well. The S&P 500 and Dow Jones Industrial Average were each unchanged. Each of the major indices settled near their intraday lows.

Curiously, turnover declined across the board. Total volume in the NYSE was 15% lower than the previous day's level, while volume in the Nasdaq declined by 5%. Volume typically surges higher in the final ninety minutes of Fed days, but turnover on the day still failed to rise. Compared to most FOMC meetings, the market's initial reaction was relatively muted. However, stocks often don't show their real reaction until several days later. In both exchanges, advancing volume exceeded declining volume by just a fractional margin.

Yesterday, the price of crude oil rose above the psychologically significant $70 level in the late morning, causing the U.S. Oil Fund (USO) to gap above the high of its recent consolidation above its 200-day MA. We bought the breakout in USO yesterday, but scratched the trade later in the day when crude failed to hold above its breakout level. There's no sense taking a potentially failed breakout overnight on the initial day of entry, as one can always re-enter the next day if the breakout confirms:



In this morning's pre-market session, the Crude Oil Continuous Contract (CL) is back above $70 and its prior high from June 19. If it holds and moves back to yesterday's high, we may take another shot at USO. Ironically, many individual oil and oil service stocks may actually be forming bearish topping patterns. The S&P Energy SPDR (XLE) bounced off support of its 50-day MA two days ago, but ran into resistance of its prior uptrend line that it fell below on June 26. Based on that indication, oil-related issues may have a tough time going higher in the near future. Nevertheless, the price of crude oil (and USO) is not always directly correlated to the movement of oil stocks.

As it did on June 25, the S&P 500 spiked above its 50-day moving average on an intraday basis, but failed to close above it. In each of the past four sessions, prior support of the 50-day moving average has acted as the new resistance level. A few days ago, we discussed how prior support usually becomes the new resistance after the support level is broken. Yesterday's action was another example of this:



If the S&P manages to rally above yesterday's high, it would be very bullish and could help send the relatively strong Nasdaq to fresh highs. Conversely, a close below yesterday's low would help solidify new resistance of the 50-day moving average and would likely trigger a sell-off that would break the June lows. With the Nasdaq trying to show resiliency and the S&P doing the opposite, we must be prepared for at least a short-term continuation of erratic, choppy market conditions.

Open ETF positions:

Long - SDS
Short - EWO

NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday e-mail alerts are also sent on as-needed basis.

Lawrence G. McMillan is the author of two best selling books on options, including Options as a Strategic Investment, recognized as essential resources for any serious option trader's library.