After retracing nearly all of last week's decline (thanks to brief short-covering rallies on Monday and Tuesday), the market's rally into the FOMC announcement was followed by a negative reaction. Now waiting to see if we get a reversal of the reversal.

Wednesday's Market Stats

This week's rally was brought to us courtesy of the manipulation in the futures market, specifically two strong spikes to the upside in the after-hours and pre-market sessions on Sunday night and Tuesday morning. The short-covering rallies were over in the first 30 minutes on Monday and the first 60 minutes on Tuesday. Each day flat-lined after the morning spike, leaving us wondering if we'd get any rally at all if not for the overnight futures rallies.

This morning they couldn't get a repeat performance and the market opened flat and remained flat into the FOMC announcement. It looked like a bullish consolidation since yesterday but this afternoon's decline instead caught too many traders leaning the wrong way and they were forced to quickly sell. This afternoon's selloff now raises questions about this week's rally attempt, especially since there appeared to be very little real buying behind it. But the day after an FOMC announcement is often a reversal of the post-FOMC reaction so that keeps the bulls in the game if we get that on Thursday.

The market has essentially been on hold all week while waiting to get through the FOMC announcement and Janet Yellen's first press conference. When she started the conference everyone thought it was a pre-recorded message since there was no one at the podium. Then someone brought in a 3-step box for Yellen to stand on and everyone could see it was a live presentation. But I digress (and of course I'm kidding -- it was only a 2-step box). Her press conference only worried the market even more, which is when the strongest selling occurred. But there's always volatility around an FOMC announcement and today was no different.

The Fed's decision to continue its taper program was fully expected and they will be reducing their QE asset purchases by another $10B/month (it will now be $55B/month, or "only" $660B annually). But the dovish statement was the scrapping of the 6.5% unemployment threshold. Up until now that's the number they've been using to suggest would become less accommodative when unemployment dropped below 6.5%. Previous statements have alluded to that being a moveable goal post, much to the chagrin of Fed followers, but by dropping the 6.5% guidance all together it should have made the stock market happy that the Fed's accommodative stance would continue regardless of how low the unemployment rate might become.

During Yellen's press conference she said dropping the 6.5% threshold was done because there are many other economic indicators that are more important in their analysis. The Fed lowered their GDP forecast (not a good sign for their expectations for the economy but good for those who want to see the Fed continue their highly accommodative policies) but at the same time it pulled forward their expectation for when they'll have to raise rates. How long the Fed will remain accommodative is now being questioned.

What disturbed traders was Yellen's definition of "considerable" when she said the Fed would remain accommodative for a "considerable" amount of time. She answered it means 6 months. Assuming the QE program will be finished by October (by reducing $10B in purchases each of the next 5 meetings by then), in addition to the "threat" of raising interest rates sooner (possibly in early 2015), the market threw a little hissy fit this afternoon. No more spiked punch bowl, no more accommodative Fed and the market will have to justify its lofty valuations based on, dare I say, fundamentals. The reaction was predictable -- SELL, MORTIMER, SELL!!

Yellen reiterated the Fed's desire to see the inflation rate at 2% and since it's been running below that rate it should have encouraged those who want (need) to see the Fed continue pumping freshly squeezed electronic money from their computers. But it wasn't enough to overcome the worry that the Fed believes it can soon become less accommodative. However, I think the Fed's statements leave enough for both sides to make their case for higher or lower stock market prices. The bears had a stronger vote this afternoon but we know many post-FOMC reactions are reversed the following day and we'll simply need to see how this shakes out over the next couple of days.

Seeing the negative market reaction I fully expect the Fed to come out with "clarifying" statements to tell us what Yellen really meant when she said "___." That could get the market rallying again, which of course is not something the Fed cares about (wink), as the Fed tries to jawbone the market higher while working off irrational hopes by market participants. The end result for today is that the market is worried QE is going to end and interest rates will start back up soon thereafter. Now we wait to see if this afternoon's selloff was just a kneejerk reaction or the start of another decline.

All of this is happening as the stock indexes poke around at their highs and with waning momentum as the highs are tested there are likely some big players getting nervous about being long the market. It probably won't take much to spook the market and keep in mind that important tops are made without a catalyst sparking a selloff. It's most often a result of selling, perhaps sparked this time by worry over what the Fed is going to do over the next 6 months, and the selling begets more selling, which quickly snowball lower if there are not many shorts in the market. That would describe the vulnerability that I see today.

But rather than guess what the market will do (well, it's always a guess no matter what analysis tools we use) I'll stick with the charts and let price tell me what the higher-probability move is likely to be. At the moment we've got some tight key price levels to watch to help us get on the right side. Starting off with a wide-angle view of the market, the SPX weekly chart below shows a short-term bullish move up to the 1915 area to complete its rally. That assumes the market reverses this afternoon's selloff and continues to rally on Thursday. Things will turn more bearish if it drops below 1830 and especially if it breaks below 1800. The first target zone for another rally comes from two price projections at 1887 and 1896, which I've shown in the past. The 1887 projection was missed by less than 4 points on March 7th. Slightly higher is a trend line along the highs from April 2012 - May 2013, near 1916, and another one from April 2010 - May 2011, near 1910. The higher trend line will be near 1920 by the end of next week.

S&P 500, SPX, Weekly chart

One of the things suggesting the market might turn down is the pattern following previous FOMC meetings. As the SPX daily chart below shows, previous meetings (circled in blue) have coincided with market turns, especially if the FOMC meeting occurred during opex week -- labeled on the chart in June, September and December 2013, and the current one. The direction of the market into the meetings was reversed (down in June and September 2013, up in December) so heading into today's announcement had me leaning short. Now we'll see if there's downside follow through tomorrow.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1875
- bearish below 1830

If the market does head higher into next week, to meet a cycle turn date on March 28th (next Friday), I'll be looking for 1912-1920 where it will meet a price projection at 1912 or press a little higher to the trend line across the highs from April 2012, near 1920 at the end of next week. A price projection for the 2nd leg of the rally from February 5th would equal 50% of the first leg up at 1912.40 so that's how I'm getting that level. The above chart is crowded but this 50% projection is based on getting a fractal pattern of the 3-wave move up from October 2013 where the 2nd leg was 50% of the 1st leg (at 1851.53, which was nearly achieved with the January 15th high less than a point shy of it, at 1850.84). A rally up to this 1912-1920 area next week, especially if by March 28th, and most especially with continuing bearish divergence, would have me salivating like a bear waiting to catch jumping salmon. But a drop below its 50-dma, near 1832 now, would be more immediately bearish.

If we're to get another rally up to the 1912-1920 area by the end of the month, we should get a 5-wave move similar to the one I've drawn on the 60-min chart below (green). This afternoon's pullback should be followed by a strong rally into Friday, consolidate into early next week and then a final leg up. That would be a nice setup to short but in between now and then it would be good for day traders to trade long. A drop back below today's low at 1850 would be bearish, in which case I'll be watching for the possibility for two equal legs down from March 7th (1830 projection for that). Below 1830 would be more bearish and in that case I'd be looking for a drop down to price-level support near 1812 before consolidating and then lower. I'll be watching the pattern very closely Thursday morning for clues for the next move but for now it would be bullish above 1875 and bearish below 1850.

S&P 500, SPX, 60-min chart

In addition to some cycle work pointing to a March 28th turn date we've got the sophisticated MPTS pointing to the end of March as a potentially important turn date as well. The next new moon is March 30th and it would certainly be an interesting setup if SPX rallies up to its upper trend line (1920) by then. Or perhaps it will mark a tradable low, at its uptrend line from June 2013, near 1790 by the end of the month.

SPX MPTS daily chart

A bullish view of the DOW's price pattern looks at the move up from October 2013 as the same fractal pattern as discussed for SPX. The October-December a-b-c move up had the c-wave 62% of the a-wave (a more typical relationship) and the same projection for the c-wave in the rally from February 5th points to 16767. Its long-term trend line along the highs from 2000-2007 is currently near 16625 and longer-term price projections that I've shown previously on the weekly chart point to 16700 as potentially important (for two equal legs up from 2009 and a 3-wave move up from October 2011 where the 2nd leg is 162% of the 1st leg). So we've got a wide target zone at 16625-16767 and if we do get another leg up into the end of the month I'll get a tighter target once the shorter-term pattern develops a little further. But if the selling continues this week, and especially if the DOW drops below 15950, it's going to look like this week's bounce was just a correction to last week's decline and a bigger selloff will follow.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,505
- bearish below 15,950

A bearish view of the DOW is shown on its 60-min chart below. It's possible this week's rally completed a right shoulder of a H&S topping pattern, with the left shoulder at the February 28th high, the head on March 7th. The neckline is across the lows on March 3rd and 14th, currently near 16040 and the downside objective out of the pattern is near 15600. From a short-term perspective it would be bullish above today's high at 16363 but bearish for now.

Dow Industrials, INDU, 60-min chart

Another rally leg for the NDX that equals 62% of the February rally points to about 3824 for an upside target if the bulls can keep the rally alive through next week. That projection crosses the trend line along the highs from October 2013 at the end of next week, which is good timing for the March 28th turn date. I'll be looking for that to happen if it can first get above today's high, at 3709, and then its March 6th high at 3738. But a drop below price-level support near 3635, its 50-dma at 3615 and the uptrend line from February 5th, also near 3615, would turn the pattern bearish.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3739
- bearish below 3615

Yesterday the RUT recaptured its broken uptrend line from November 2012 but today it closed back below it, leaving the potential for a kiss goodbye following a back test. Below last Thursday's low near 1172 would be bearish confirmation but upside potential still exists up to about 1235 where it would again test its trend line along the highs since July 2013 (March 28th is where it crosses about 1235).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1215
- bearish below 1172

Bonds quickly sold off following the FOMC announcement, which of course drove yields higher. The Fed's statement about the possibility rates could rise earlier in 2015 spooked the bond market into selling, especially since the QE buying will continue to decrease through October. TNX (10-year yield) now has a 3-wave bounce off last Friday's low and two equal legs up is at 2.763%, a little below the 78.6% retracement (2.776%) of the March 7-14 decline, which is as far as the bounce should go if the leg down March 7th is the start of its next big decline. The 78.6% retracement would also be another test of its downtrend line from 2007-2011, which it tried to break above into its March 7th high. We should find out over the next few days if bonds will continue to sell off, driving rates higher (regardless of what the Fed wants), or if this afternoon's reaction was just long-covering in bonds, to be followed by another rally leg (driving yields lower).

10-year Yield, TNX, Daily chart

Not helping the bond market is an apparent liquidation of Treasuries by foreign and institutional holdings, as can be seen in the chart below. The sudden drop last week, about $104B, is a worrisome development (for bond prices and in turn higher yields) if it continues. Was it Russia dumping their Treasuries before the U.S. slapped a freeze on their accounts? Perhaps other foreigners are getting nervous about the U.S.'s ability to pay our debt (add me to that list). Regardless of the reason, it bears watching over the next several weeks, especially if Russia and others start dumping their holdings. Foreigners have been selling since last November, as can be seen on the chart, and it could beget more selling and snowball quickly. We'd probably see the Fed step in and start another massive QE program if that happened.

Treasury holdings by foreigners and institutions, Weekly chart courtesy businessinsider.com

U.S. Dollar shorts ran for cover this afternoon as fears of a less accommodative Fed will result in a stronger dollar, which spiked up more than 60 cents (a big move for the dollar) on the announcement. It pulled back a little at the end of the day and closed on its broken uptrend line from 2011-2013, as can be seen on its daily chart below. That leaves us guessing whether today's rally will result in just a back test and then a bearish kiss goodbye or if instead this afternoon's rally kicked off what will become a much larger rally. I'm leaning long the dollar but only as long as it holds above last Thursday's low at 79.27.

U.S. Dollar contract, DX, Daily chart

Gold has given back about $62 of its rally in the past 3 days and today it closed on its uptrend line from December 31st. A drop below its March 7th low at 1326.60 would confirm the rally leg has finished and that in turn could be the conclusion of its a-b-c bounce off the June 2013 low. During the after-hours session the low so far is 1326.10, which confirms the high is in for now. Whether it will develop into just a pullback correction before heading higher or instead drop down to a new low can't be determined yet but I think gold will now head down to the 1100-1155 area (potentially lower) before setting up a better opportunity to accumulate some of the shiny metal.

Gold continuous contract, GC, Daily chart

Oil shot higher today, which was a little odd considering the dollar's rally, but it has rallied up to resistance so the bulls need some follow through here. Its 200-dma is at 100.31 (today's close was 100.41) and its broken downtrend line from 2011-2012 is near 100.60. The bearish pattern suggests we could see some choppy price action over the next couple of weeks before heading lower but a rally above 102 would be a bullish heads up that another strong rally is coming.

Oil continuous contract, CL, Daily chart

Another perspective for oil is to look at price vs. the Commitment of Traders (COT) report. This is another one of those tools that's not for timing the market but instead it's good for warning when it's vulnerable to a reversal (by looking for extremes and differences between smart and dumb money). The bottom portion of the chart below shows the COT positions -- the green shows the net position of the large speculators (their net long position is near the highest level for the past year), red is the Commercials (smart money, and they hold a net short position that's close to the largest net short position in the past year) and blue is the small speculators (holding the largest net long position for the past year). It's almost always smart to trade with the Commercials and against the speculators when they're showing an extreme, as they are now. In other words, used in a contrarian way, this tells us oil is about to tumble lower.

Oil vs. COT, Weekly chart

Other than the unemployment claims (even the Fed is now ignoring this kind of data), after the bell we'll get existing home sales numbers, the Philly Fed and Leading indicators tomorrow morning. Unless the numbers are horrid I don't think they'll move the market. That seems to be done in the futures market before the market opens.

Economic reports and Summary

The pattern of reversals in the market on FOMC days (+/- a day) is holding after getting the selloff following a rally into FOMC. As I showed on the SPX chart, this pattern has been seen since last June's FOMC. This suggests this afternoon's selloff will continue. Countering that expectation is another pattern that's common around FOMC -- the day after the FOMC announcement is typically a reversal of the post-FOMC reaction. We need to be prepared for either one to happen and if we do see a continuation of the rally I think it will continue into the end of the month, in which case I'll be looking for a high around a cycle turn date of March 28th.

If the selling continues on Thursday, especially if it breaks below last week's lows, there is the potential for a stronger selloff than last week's decline. The first downside target to watch for will be two equal legs down from March 7th and if it doesn't stop there then we'll have something more bearish and something that would increase the odds that we might have seen the high for the year (in which case it will likely be the high for many years). Tomorrow's price action will point the way for the rest of the month and we'll pick it up from there next week.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying