Stocks started strong Wednesday but yielded all of their gains following a policy statement from the Fed that fell short of expectations. As expected, the FOMC held rates at 0.25%, but went on to say that rates would remain low as long as the unemployment rate remains above 6.5%. It announced that “Operation Twist” would be replaced by a $45 billion monthly buyback of Treasurys in addition to the $40 billion in mortgage-backed securities it purchases. The Fed also reduced its GDP estimate for 2012 from 2% to 1.8%, and 2013 was reduced to 2.3% from 2.5%.
It appeared that little progress was being made on the fiscal cliff, and the stock markets fell modestly. At the close, the Dow Jones Industrial Average was off 3 points at 13,245, the S&P 500 rose 1 point to 1,428, and the Nasdaq fell 8 points to 3,014. The NYSE traded 693 million shares and the Nasdaq crossed 380 million. On the Big Board, decliners were slightly ahead of advancers, and on the Nasdaq, decliners were ahead by 1.5-to-1.
The market reversed Wednesday as Fed Chairman Ben Bernanke warned that dragging on negotiations could have a very nasty impact on the economy. Big surprise. Everyone has been saying that for month, but the gravity of the impasse was voiced by the chairman of the bully pulpit with the most influence and investors trembled.
Just as the Dow was preparing to mount a charge against the downtrend line that marked the market’s high and second highest high, it reversed and triggered sells signals from our internal indicator, the Collins Bollinger Reversal (CBR), and the stochastic. But support is close by — first at the Dow’s 50-day moving average at 13,133, and then at the 200-day moving average at 13,002.
Like the Dow, the Nasdaq was also smacked with CBR and stochastic sell signals. But unlike the Dow, with its 50-day moving average at 3,000 and its 200-day at 2,989, the Nasdaq has little room to maneuver. A fall through those major support lines could cause real trouble for this index.
Conclusion: Senate Majority Leader Harry Reid appeared to have ruined Tuesday’s rally, but most observers have learned to take his off-the-cuff remarks less seriously than comments from Fed Chairman Bernanke. Mr. Bernanke’s two-hour dissertation had impact. And as his remarks are dissected and studied in minute detail, they could cast a negative tone on the markets for the remainder of this week.
Technically, the market signaled that a short-term reversal could take prices down to their next support level — that is until another headline appears and the market swings up or down depending on what is said.
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Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.