At first the U.S. dollar dipped and the stock market rose yesterday — a familiar pattern. But then the Federal Reserve spoke and early gains vanished as traders interpreted the Fed’s view of the economy as improving, and that could mean higher interest rates.

What the Fed said was that economic activity has improved and that deterioration in the labor market is abating. The committee also said that conditions in the financial markets are better.

But the Fed went on to state that the target rate for Fed funds rate will remain at 0% to 0.25%, and that economic conditions are likely to require interest rates to remain low for an extended period.

Citigroup (C) fell 3.1% following an Abu Dhabi Investment Authority demand that the bank cancel a deal that would see the fund take a heavy loss on a $7.5 billion investment in the bank. Citigroup was expected to price $22 billion worth of shares in a public offering on Wednesday. Meanwhile, the Washington Post reported that the federal government quietly agreed to forego billions of dollars in potential tax payments from Citigroup in order to help the company wean itself from the huge bailout earlier this year.

At the close, the Dow Jones Industrial Average (DJI) was off 11 points to 10,442, the S&P 500 (SPX) rose a point to 1,109, and the Nasdaq (NASD) gained 6 points to 2,207.

The NYSE traded 1.2 billion shares with advancers over decliners by a margin of almost 2-to-1. The Nasdaq traded 573 million shares and advancers there were ahead by 3-to-2.

Crude oil for January delivery rose $1.97, closing at $72.66 a barrel, and the Energy Select Sector SPDR (XLE) gained 36 cents, closing at $56.64. The gains were due to a government report that indicated that stockpiles of oil and fuel dropped more than expected last week.

December gold rose $13.10 to $1,135.50, and the PHLX Gold/Silver Sector Index (XAU) gained $2.29, closing at $173.45.

What the Markets Are Saying

On Monday, the three major indices managed to close at new highs for the year.

For the Dow, the close was at 10,501, which is 30 points above its prior closing high. The S&P closed at 1,114, 4 points above its prior high. And the Nasdaq closed at 2,212, which is 9 points above its prior high.

But instead of the expected follow-through, each index hesitated and then sagged. With the S&P 500 still struggling with the top of 1,120, it was disappointing for the bulls to fail to punch through that barrier. And yesterday’s failure to make a clean break forms another top, making this a quadruple-top formation.

Some analysts would say that the longer any barrier is successful in holding back the attempt to overcome it, the weaker the penetration when it finally does make it over — like an assault by infantry that takes months to accomplish leaving the victors too exhausted to move on.

But that doesn’t mean that the bulls will end up defeated. There are several very encouraging signs that lead me to believe that the breakout will occur, and probably this year.

First, two major Dow indices (transportation and utility) have cleanly broken through the resistance, which confirms that the bull market is still alive. The Dow Jones Transportation Average (DJT) is now more than 65 points above its breakout, and the Dow Jones Utility Average (DJU) has surmounted it by over 13 points. And although these are more conservative indices, it does show that money is flowing into the market, albeit at a very measured pace.

Tomorrow, as usual, we’ll consider the internal and sentiment indicators for more clues to the market’s next move. I’m convinced that the direction will be up.

Today’s Trading Landscape

Earnings to be reported before the opening include: Actuant, Bio-Reference Labs, Discover Financial Services, FedEx, General Mills, Marcus Corp., Pier 1 Imports, Rite Aid Corp., Scholastic Corp. and Winnebago Industries.

Earnings to be reported after the close: 3Com, Accenture, Applied Signal Technology, Carter Holdings, Darden Restaurants, Heico, Nike, Oracle, Palm, Quiksilver, Research In Motion and Steelcase.

Economic reports due: leading indicators (the consensus expects 0.7%), Philadelphia Fed survey (the consensus expects 16.5), EIA natural gas storage report, Fed balance sheet and money supply.

Late news: Initial jobless claims rose 7,000 to a seasonally adjusted 480,000, above the consensus estimate of 465,000.

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