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Ahead of tomorrow's FOMC decision, much confusion abounds as to what the decision is likely to be. Increasingly, some cry for the FOMC to raise the target rate by fifty basis points and just be done. With little economic news to distract equity investors from the pause/25-basis-points/50-basis-points arguments, those investors showed their confusion in today's trading patterns.

That's been true all week. Instead of clamping down into tight ranges, as often happens ahead of a FOMC decision, some indices have been zigging and zagging from one side to another of recently established consolidation zones. Admittedly, the ranges narrowed this week, but not in the way they often do.

Intraday, the evidence contributes to the confusion. For example, what were tech investors to believe yesterday? The early action showed the Russell 2000 heading higher, climbing above 700 in early trading, and the SOX heading lower. All knew that one direction was eventually going to prevail, and the confusion produced by opposite actions of these two signal indices finally resulted in a down day for techs.


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Today's early trading pattern produced another conundrum. Rate-sensitive financials, particularly those comprising the BIX, the S&P Banks Index, and BKX, the KBW Bank Index, immediately headed higher, but techs soon weakened. Were investors to believe the important financials or the equally important techs? Figuratively, indices staggered around for a few hours before a late afternoon push brought most into positive territory and created long lower shadows springing up from support on several others that didn't quite make it to positive territory.

Breadth indicators were positive during the earliest part of the session, but by mid-afternoon, advancers were only slightly ahead of decliners on the NYSE, while decliners had pulled slightly ahead of advancers on the Nasdaq. By 3:30, that mixed-up pattern had resolved, with advancers ahead on both exchanges, although only slightly so on the Nasdaq. During much of the day, the VIX was higher than yesterday's readings, the TRIN, lower.

Several IPO's debuted, also with mixed results, but they may have drawn the attention and the funds of some investors who were tired of trying to game the major indices. At one point at least, J. Crew's shares were the most active on the New York Stock Exchange, but those who jumped into a J. Crew play soon found themselves caught in an ever-narrowing triangle that didn't break upward again until late in the session.

Confusion reins and will until the immediate volatility dies down tomorrow, after the FOMC decision is announced. Because I don't want to encourage short-term plays in such a confused market environment, I'm going to focus on weekly charts and a longer-term look at what's at stake in tonight's charts.

Annotated Weekly Chart of the SPX:

This weekly chart shows that although there have been some intraweek piercings of support and resistance, that support and resistance are bound by the weekly 72-ema on the bottom and the 50-sma on the top. It would take a weekly close above or below that resistance or support to break the SPX out of the latest range.

Over the short-term, however, I turned to Keltner charts and the five-minute 100/130-ema's to look for support and resistance. Since the five-minute 100/130-ema's served as such a good bearish/bullish barometer this week, bulls will want to see the SPX stay above those averages on any retest. They're currently just above 1243 and are rising toward the SPX, with the SPX pulling back in a sideways/sideways-down regression channel off the day's high. That could likely be a bull flag, but bulls want to see that five-minute 100/130-ema support hold. Fifteen-minute Keltner channels suggest that a Keltner line currently at 1248.28 but rising slightly, could serve as resistance. I put less credence than usual in my trusted nested Keltner channel setup, however, since investor sentiment will be keyed to the impending FOMC decision. Trade with care tomorrow, if tempted to trade.

With the Dow again today testing its daily 200-sma, a daily rather than a weekly view of the Dow might be best.

Annotated Daily Chart of the Dow:

It's somewhat ominous that the Dow confirmed a head-and-shoulders pattern, rose to retest the neckline of that pattern and since has pulled back. In addition, bulls would have felt more comfortable if the Dow had managed a close above its 10-dma. In the bull's favor is the fact that bears weren't able to drive the Dow lower today after it retested the 200-sma.

A short-term look reveals that the Dow's five-minute 100/130-ema's are at 10,951 and 10,954, support that short-term bulls want to see hold on pullbacks. Those averages are dynamic so don't expect them to stay at the same level all day. Keltner resistance is also dynamic, but at the close was just above the Dow at 10,979 on 15-minute closes and then again at 11,001.40.

Yesterday, the Nasdaq broke below the support of a triangle it had been forming on the daily chart, but today it charged right back up toward the bottom of that triangle. In doing so, it moved back toward the long-term supporting trendline on its weekly chart.

Annotated Weekly Chart of the Nasdaq:

Tuesday, the Nasdaq headed lower, and the after-hours developments from Rambus (RMBS) mentioned in last night's Wrap sent tech-related indices lower this morning, too. The SOX, for example, dipped into a retest of its 200-week moving average. INTC buyers stepped in, however, sending the tech giant and SOX component up to challenge the neckline of a canted-sideways inverse head-and-shoulder on its daily chart. INTC was to confirm that small inverse H&S and continue climbing all afternoon, posting a 3.49 percent gain by the end of the day.

INTC helped the Nasdaq push above its five-minute 100/130-ema's in that same period when other indices did so. So far, it's been holding their support on retests, with those averages at 2105.52 and 2107.02 at the end of the day. Although these averages and this chopping back and forth matter little in the longer-term, short-term bulls want to see the Nasdaq continue to find support on these averages on pullbacks. Nested Keltner channels suggest that, as of the close, next short-term resistance would be found from 2115.26-2117.64. At about that level, the Nasdaq will be testing the neckline of its own inverse H&S on the 15-minute chart. Bulls want to see this formation confirmed, as INTC did its similar formation, and don't want to see another case when the right shoulder lengthens in time, with prices moving sideways while the formation dissipates.

While INTC helped the SOX, too, it didn't help it move above the five-minute 100/130-ema's. The SOX is testing those averages, but hasn't managed a five-minute close above them. Therefore, that's where next resistance lies for the SOX: at 428.75-429.97. Turning to the nested Keltner channels for information on support turns up possible support at 426.37-427.53, and bulls want that to hold on pullbacks, on 15-minute closes. They would prefer that 428.08 support hold on 15-minute closes, however.

The SOX's daily candle produced a potential reversal signal, with the SOX springing up and leaving a long candle shadow beneath. A study of the weekly chart turns up the reason for that spring: the SOX's dip had tested the important weekly 200-sma. That's the blue average on the chart seen below.

Annotated Weekly Chart of the SOX:

Several companies made announcements late Tuesday that proved mostly negative, including those by WEN, NKE, and AMCC. Today, analysts jumped into the fray with some negatives statements of their own. A J.P. Morgan analyst speculated that Nokia's suppliers Texas Instruments (TXN) and RF Micro Devices (RFMD) might be negatively impacted by weakness in Motorola (MOT) and by evidence that suggested that Nokia (NOK) might be pushing back orders for components for its handsets. TXN is of course one of the components of the SOX. TXN closed lower by 2.32 percent. RFMD dropped 3.98 percent; MOT, 1.88 percent; and NOK, 2.34 percent.

Other company- or sector-related news included EMI's announcement that EMI Group PLC and Warner Music Group were discussing a merger. Yesterday, as many may recall, Warner had made a cash offer for EMI that the company rejected out of hand, with that offer coming four days after EMI had made an offer for Warner. Analysts appear to favor a deal that would combine the two companies, moving the combined companies into second place behind Universal in the recorded music market, but analysts aren't yet convinced that these two contentious companies can strike a deal.

The bad news wasn't over with those announcements. An analyst with Banc of America cut the firm's forecasts for profit estimates on D.R. Horton (DHI), Hovnanian Enterprises Inc. (HOV), Meritage Homes Corp. (MTH) and Pulte Homes Inc. (PHM). Price targets were lowered for each, to $26.00, $28.00, $39.00, and $26.00, respectively. It might be noted that DHI is already below that target price. DHI kept its buy rating; HOV, its neutral rating; and MTH, its sell rating; and PHM earned a neutral rating. Ryland Group's (RYL) target price was also lowered, to $39.00, and Standard Pacific Corp's (SPF) target price was lowered to $24.00. The analyst also lowered stock price targets on NVR, WCI and CHCI.

DHI managed a gain of 0.25 percent, but HOV dropped 1.42 percent; MTH, 0.44 percent; PHM, 0.24 percent; RYL, 1.26 percent; and SPF 0.70 percent. The DJUSHB, the Dow Jones Home Construction Index, dropped 0.46 percent.

At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for last week, with that survey possibly also impacting the DJUSHB. The headline on the release said it all. Mortgage rates rose, and application volume declined. The volume of those applications dropped to a four-year low, down a seasonally adjusted 6.2 percent from the previous week's number and 31 percent from the year-ago number. Refinancing loan applications fell a seasonally adjusted 7.5 percent from the previous week's number and 47 percent below the previous year's number. They also dropped as a percentage of total loan applications. Applications for adjustable-rate loans also dropped as a percentage of total loan applications. Meanwhile the average rate for a 30-year fixed-rate loan climbed to 6.86 percent, the highest it's been since April 2002.

Not all sectors received bad news. Ahead of the crude inventories release, Merrill Lynch raised its forecasts for oil price for 2006-2008. The firm also upgraded Hess Corp. (HES) to a buy rating. HES gained 4.58 percent. The XOI and OIX, oil indices, both climbed today, too, by 1.87 and 2.17 percent, respectively. Both rose ahead of the crude inventories number, pulled back to support afterwards, and then took off higher again. They did their part in helping to support the indices. The XOI, in particular, has been skipping along above its five-minute 100/130-ema's, propelled upward every time it approaches those averages.

Expectations for crude inventories had not prepared market participants for the deep draw downs in crude and gasoline inventories. Just ahead of the July 4 weekend, the Department of Energy reported that crude inventories dropped 3.4 million barrels and gasoline inventories dropped 1 million barrels. Inventories of distillates rose 1.8 million barrels. Crude jumped after the release, but only briefly. It chopped down toward $71.60 support, violating it for a few minutes before climbing again into the Nymex close. QCharts shows the close at $72.19.

More positive information included the introduction of J. Crew's (JCG) IPO, trading above its $20.00 IPO price at the open, and closing at $25.70, just off the high of the day. Nine IPO's had been scheduled for this week, although speculation now trims that estimate to seven to nine to be introduced, with some IPO's being delayed. Some of those IPO's are pricing below their expected ranges. Omniture's (OMTR) range had been expected to be $7.50 to $9.00 a share, but it opened at $6.50 and fell in early action to a low of $5.60. It saw an end-of-day bounce that closed it at $6.51. Like JCG, PGT (PGTI) closed near its high of the day, at $15.39, with the high at $15.50. Replidyne (RDYN) was priced at $10.00 and closed at $10.05, with a low of $9.66 and a high of $10.25.

In another development, the Senate confirmed Bush-nominee Henry Paulson as the next Treasury secretary. Some worried that in his official statement, he did not mention a desire for a "strong dollar," but many praised his experience in international finance and his relationships in China, in particular. Paulson believes that eliminating President Bush's tax cuts could dampen economic growth. He thinks that the federal deficit is too weighty, but believes that a growing economy can reduce that deficit.

Not a lot happened today on the economic front. Tomorrow's economic releases will be overshadowed by the FOMC decision, released at 2:15, but will include the first quarter's final GDP and chain deflator, released at 8:30. Estimates are for a final GDP of 5.3-5.6 percent, and a chain deflator of 3.3 percent. Although in normal circumstances, the final GDP might not move markets unless the revision was a big one, that chain deflator, an important inflation measure, will be closely watched ahead of the afternoon's FOMC decision. Watch for a bond market reaction to determine whether the numbers have worried the bond traders.

Be aware that while equity markets may not quite have decided whether they'll wait out the decision at support or resistance, the bond market may be one that's settled into its pre-FOMC mode. It may stay there and may not be a strong indicator of short-term sentiment, such as how the markets are reacting to the deflator. One source noted today that although the auction on 5-year notes drew the worse indirect bidder participation in three years, bonds showed little reaction. I would quibble with that impression and think the analyst was only a bit too quick to draw that impression, writing before bonds dropped and yields moved higher into the bond market close. However, the ten-year's yield rose back to challenge the 5.245 percent intraday high reached on Monday, and that may be where bond traders intend to sit out the decision.

While the consensus might be that the target rates will be hiked to 5.25 percent, it seems that less consensus results the closer the announcement draws. One headline this morning speculated whether the Fed would announce a bigger rate hike this time, a rumor that has roiled the markets for the last several weeks. One MarketWatch article by Rex Nutting concluded that none of the 44 economists surveyed for the article expected a half-point rate hike this week, despite all the swirling rumors. Still, some seem to want the one-and-done 50-point hike, and that group includes some doves, who want that signal that the Fed is done. At least one Bear Stearns economist and two CNBC guest commentators today believe that this strategy could work since it would signal Bernanke's willingness to be tough on inflation and would also reassure market participants that there was now room for a pause to await further data, if not a cessation of rate hikes.

Others differ, with some speculating now that the eventual target rate will be a 6.00 percent one. With speculation ranging from a pause all the way up to a one-and-done 50-basis-point hike and even up to several more hikes, equities proved more volatile this week going into the meeting, bouncing back and forth to the boundaries of recently established support/resistance zones rather than clamping down all week.

The usual post-FOMC-decision volatility may be exacerbated, too, especially with forex news sources reporting that recession models are now predicting a 45.5 percent chance of a recession if the target rate is raised by 25 basis points tomorrow and a 49 percent chance if it's raised by 50 basis points. These estimates were reported yesterday by Reuters and incorporate estimates from Merrill, using a model proposed by Fed economist Jonathan Wright. The model employs the yield curve, however, and some, including our own FOMC's former chairman Alan Greenspan, have noted something strange happening with the yield curve. The model may not be as helpful as it has been in the past, some believe.

I'm not an economist, and I don't know what to make of the yield curve conundrum. Like Jim last night in his Wrap, I'm not going to speculate on what the FOMC will do. FOMC Chairman Ben Bernanke has too little history as chairman to make that speculation. Opinions about what he has been signaling and what it would mean for the markets diverge too widely. I wondered if this time, the most expected option of a 25-basis-point hike wouldn't be the one to cause the most damage, but that's pure speculation. My thinking was that a pause might reassure markets that Ben Bernanke wouldn't lead the committee into its usual tactic of going too far, and a 50-point hike might prompt a short-squeeze at least, as some speculated that the Fed might be done, while a 25-basis-point hike would keep that hatchet poised over the market. That's pure speculation, however, and, in the case of a 50-point hike, any pop would depend on whether the FOMC signaled that it might be through. Even then, it might not hold. Don't trade on my speculations any more than you would anyone else's. I'm not going to do that. I've got some credit spreads and intend to use the post-FOMC reaction to establish some others if the markets swing widely enough that I can swing some spreads far away from the action, but I will not be guessing ahead of the decision.

Market participants have had less opportunity than usual to position themselves ahead of the decision because of the uncertainty that has crept into the markets due to recent data. Unless you're an adept scalper, I would not day trade this market ahead of the decision and would be leery of trading it afterwards, too, until the post-decision volatility has been tamped down. I've pointed out some likely support and resistance levels, on both the weekly and intraday charts.

As Jim did, I would also warn of the impact of a Russell rebalancing at Friday's close. Last year, due to some peculiarities of the rebalancing, the Russell 2000 actually broke higher during and after the rebalancing period, with the last trading day of June being the expected down day, but Jim has already well laid out the traditional reaction. Whether we see a repeat of last year's reaction or a reassertion of the traditional one, the rebalancing is likely to contribute to the post-FOMC volatility as will normal end-of-quarter action.

Instead of window dressing, there may have been some window undressing at play this week, since some of the previously weakest sectors were those being sold, with fund managers perhaps not wanting to be holding the dogs in their baskets of stocks. However, late this afternoon, I began noticing that several indices were breaking above their five-minute 100-ema's within a few minutes of each other, from about 2:25-2:40, with some such as the SOX, lagging that action, and some, like the BIX, leading it. News that Sunni insurgent groups would consider stopping attacks if the U.S. agreed to withdraw its troops from the region had surfaced just before the buying occurred, so the buying may have been prompted by this development. However, seeing so many indices break above the same averages in such a lockstep manner suggests some across-the-board buying this afternoon, either as part of a positioning ahead of the FOMC decision or as part of a window-dressing attempt or maybe even as a result of that geopolitical development. My first "undressing" theory was partly thrown out the window this afternoon, although confusion persists due to the timing.

My best advice is to wait out that initial volatility, watch until a formation sets up, and then, if inclined, enter on a break of that formation. Typically, a triangle sets up, lines can be drawn, and you can identify a breakout or breakdown. Remember, though, that our nation is not the only one in which financial experts are on inflation watch. The ECB meets next week. Keep stops at account-appropriate levels and heed them.

After-hours developments this afternoon included Walt Disney Company's announcement that John Pepper, Jr., a current director of Disney and a former CEO of PG, will serve as its non-executive chairman, beginning January 1, 2007. Raytheon (RTN) announced that the SEC has authorized a $12 million penalty payment in which the company will not have to admit or deny wrongdoing, in a previously disclosed investigation into accounting and disclosure practices. CI said its board had authorized a $500 million stock buyback program. MANU announced that its shareholders had approved the acquisition of JDA Software Group (JDAS). Shares of Alexion Pharmaceuticals dropped heavily after the company said its Phase III clinical trials for its angioplasty drug did not produce statistically significant reductions in mortality.

Reports other than the GDP and deflator tomorrow include May's Help-Wanted Index. That will be released at 10:00, thirty minutes before the natural-gas inventories at 10:30. Companies reporting earnings include ACN, STZ, GIS, MON, PALM, and RIMM.

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