Financial stocks took a beating yesterday, and they dragged the rest of the market with them. It was the worst day in a month for the market, with the Dow Jones Industrial Average (DJI) losing more than 1%.

The Dow decline was led by Bank of America (BAC), down 5%, JPMorgan (JPM), off 3.4%, and General Electric (GE), off 4%.

Regional banks fell 4.2%, diversified banks fell 5.6%, and diversified financial firms fell 4.4%.

CIT Group (CIT) fell 19% after delaying the filing of its quarterly report, and MBIA (MBI) was clobbered with a 13% loss following a downgrade by JPMorgan.

Second-quarter productivity increased by 6.4%, which was better than most analysts expected, and the strongest since Q3 2003.

And there was another surprise: Unit labor costs during Q2 2009 fell 5.8%, the sharpest drop in eight years.

However, neither report seemed to have an impact on stock prices.

This afternoon’s FOMC announcement on interest rates will be the focus of everyone’s attention. The consensus is for no change in rates, but investors will be looking for any comments on future assessments of the economy by the Fed governors and for any hints of when the Fed plans to end its easy-money policy.

At the close, the Dow was off 97 points to 9,241, the S&P 500 (SPX) fell 13 points to 994, and the Nasdaq (NASD) fell 23 points to 1,970.

The Big Board traded 1.2 billion shares with decliners ahead by 3-to-1. On the Nasdaq, decliners were ahead by about 2.5-to-1.

Crude oil (September contract) fell $1.15, closing at $69.45 a barrel, and the Energy Select Sector SPDR (XLE) dropped 74 cents to $50.31.

December gold rose 70 cents to $947.60 an ounce, and the PHLX Gold/Silver Index (XAU) closed at $143.53, off $2.38.

What the Markets Are Saying

With the markets “rolling over” yesterday, as one commentator put it, the conclusion might be that we are in the correction that has been anticipated for weeks. But that’s not yet clear.

One method to evaluate short-term trends is through “trading bands,” and my favorite is the Bollinger band.

The bands are constructed around a nine-day moving average with the upper band 2 standard deviations above the average and the lower band 2 standard deviations below the average. The closer the prices move to the upper band, the more overbought the market; the closer prices move to the lower band, the more oversold the market.

Traditionally this indicator is used in conjunction with other indicators, usually a momentum indicator. A security that has entered into overbought or oversold territory may continue to become more so before reversing. But by comparing where the Bollinger indicator is in relation to the momentum indicator, an experienced analyst is often able to make an educated guess as to the direction of the next several days.

Currently, the Dow and the S&P 500 are in a slightly oversold condition on both the Bollinger and the momentum indicators. And the Nasdaq is oversold on the Bollinger and momentum indicator. Additionally, the Nasdaq’s intraday low yesterday fell exactly on the 20-day moving average and found support.

Conclusion: This analysis tells us that the chances are strong that the market will reverse up very shortly — perhaps even today following the Fed’s announcement. But if the major indices close below yesterday’s lows, look for them to retreat to the next levels of minor support, which is 9,000 for the Dow, 975 for the S&P 500, and 1,945 for the Nasdaq.

Learn how you can use Bollinger bands to improve your trading.

Today’s Trading Landscape

Earnings to be reported include: Advance Auto Parts, Aegean Marine Petroleum Network, Allot Communications Ltd., Bally Technologies S.A., BHP Billiton PLC, Biospecifics Technologies, Braskem S.A., CACI International, CAE, CameCo, China Automotive Systems, China Transinfo Technology Corp., CombiMatrix Corp., Companhia Paranaense de Energia (Copel), CPI International, Crown Crafts, CTI Industries, E-House (China) Holdings Ltd., Ethan Allen Interiors, FirstCity Financial, GigOptix, Great Basin Gold, Gushan Environmental Energy Ltd., Harris, Hillenbrand, Hurray Holding Co. Ltd., Hutchison Telecommunications International Ltd., ING Groep NV, Ituran Location & Control, JA Solar Holdings Co. Ltd., Kinross Gold, LDK Solar Co. Ltd., LeCroy Corp., Liz Claiborne, Macy’s, Magnetek, Maidenform Brands, Middleby, MIPS Technologies, NetEase.com, Oncothyreon, Orckit Communications, Penn West Energy Trust, Procera Networks, ReneSola Ltd., Rick’s Cabaret International, Sara Lee, ShoreTel, SRA International, The Progressive Corp., Toll Brothers, Trailer Bridge, U.S. Home Systems, Ultrapar Participacoes S/A, Ultrapetrol Bahamas Ltd., White Electronic Designs, Xinhua Sports & Entertainment Ltd., Youbet.com and Yucheng Technologies Ltd.

Economic reports due: MBA Purchase Applications, international trade (the consensus expects -$28.5 billion), EIA Petroleum Status Report, Treasury budget (the consensus expects -$180 billion), and the FOMC meeting announcement.

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