STOCKS FALL SHARPLY AFTER FED ANNOUNCEMENT - RSI BECOMES OVERBOUGHT FOR DIA - EURO MOVES WITH STOCK MARKET - OIL GETS HIT BY RISING SUPPLIES - BONDS BOUNCE AFTER FED ANNOUNCEMENT - TELECOM ETF BREAKS RESISTANCE - AT&T AND CENTURYTEL LEAD

STOCKS DECLINE AFTER FED STATEMENT... Video Link (click here)
As was widely expected, the Fed left the Fed Funds rate unchanged. With a target range of 0-.25%, Fed Funds are trading at record lows. Whats more, the Fed said it would keep the target rate near these record lows for an extended period of time. Stocks were up heading into the announcement and extended their gains immediately afterwards. However, these gains were short-lived as the stock market fell sharply in the final hour of trading. Chart 1 shows the Dow Industrials exceeding 9910 after the Fed announcement and then plunging below 9750 in the final hour. The Dow lost over 150 points with this late sell-off.

Chart 1

DIA STALLS FOR FIFTH DAY... Despite a negative reaction to the Fed announcement today, the medium-term trend remains up for the major index ETFs. Chart 2 shows the Dow Diamonds (DIA) recording a new high for the move this week. While new reaction highs affirm uptrends, the ETF is also looking quite overbought and ripe for a pullback or consolidation. First, DIA is up around 20% from its July low. Such a strong advance in a short period of time creates an overextended situation. Second, RSI moved above 70 last week and back below 70 today. A pullback in RSI would entail a move back towards 50, which acts as a support zone in an uptrend. Third, DIA stalled over the last five days. Prior to todays intraday reversal, DIA formed four doji type candlesticks. Such indecision after a sharp advance could foreshadow a short-term reversal or pullback.

Chart 2

EURO MOVES WITH STOCK MARKET... The Euro followed, or perhaps led, the stock market lower in the final hour. One would have to watch the tick-by-tick trades to determine the leader and the follower. For now, it is safe to say that stocks and the Euro ETF (FXE) are positively correlated, which infers that stocks and the Dollar are negatively correlated. FXE was trading above 148 after the Fed announcement, but gave up its gains in the final hour. Even though chart 3 shows a clear uptrend for the Euro ETF, the ETF is overbought after RSI moved above 70 this month. The blue dotted lines show prior periods when RSI moved above 70. Overbought readings in this momentum oscillator increase the chances of a pullback.

Chart 3

Chart 4 shows the Dollar Bullish ETF (UUP) recovering from early losses and closing with a small gain on Wednesday. Even with this intraday reversal, the bigger trend is clearly down. Just as RSI became overbought for the Euro, RSI became oversold for the Dollar. Also notice that the 45-50 zone marked RSI support for the Euro. Conversely, the 50-55 zone marks RSI resistance for the Dollar. A trendline break in the Dollar Bullish ETF and RSI move above 55 are needed to even consider a trend reversal.

Chart 4

OIL PLUNGES ON SUPPLY CONCERNS ... Crude futures fell below $70 after the Energy Department reported a surprise rise in oil supplies. According to Bloomberg, the market expected a decline of 1.4 million barrels, but instead got an increase of 2.86 million barrels. Oil has been stuck in a trading range since early August. Chart 5 shows the US Oil Fund ETF (USO) surging to 38 on August 1st and then moving into a trading range. With todays sharp decline, USO is testing trading range support from the August-September lows. A break below this support level would be negative.

Chart 5

A falling Dollar and rising stock market failed to lift oil in August-September. The indicator window shows the price plots for the US Oil Fund and the Dollar Bullish ETF. Even though the greenback declined from June to September, oil failed to break above resistance. Normally, oil would move higher when the Dollar moves lower. It is negative when a security fails to move higher in the face of positive news. A break below support would be the last straw for the US Oil Fund ETF.

BONDS BOUNCE AFTER FED ANNOUNCEMENT... With oil down sharply and stocks falling after the Fed announcement, money moved into the bond market. Chart 6 shows the 20+ Year Treasury ETF (TLT) recovering from early losses and closing with a small gain. Overall, TLT broke triangle resistance with a surge in August and this resistance zone turned into a support zone that is holding. Bonds are in good shape as long as TLT holds above 93.

Chart 6

The indicator window shows the 20+ Year Treasury ETF (red) with the Commodity Tracking Fund (black). I showed this inverse relationship last week. Notice how bonds move up as commodities more lower - and visa versa. With todays sharp decline in oil and the late reversal in the Dollar, the Commodity Tracking Fund closed lower on Wednesday. This combination is benefiting bonds.

TELECOM ETF BREAKS RESISTANCE... The iShares Telecom ETF (IYZ) played a little catch-up with a break above its summer highs. Chart 7 shows IYZ breaking neckline resistance of an inverse head-and-shoulders pattern. Head-and-shoulders patterns are usually associated with reversals, but they can also signal a continuation of a prior trend. IYZ surged from 13 to 18 and then stalled as the head-and-shoulders pattern evolved. This stall represents one big consolidation after an advance. The subsequent break above neckline resistance signals a continuation of the prior uptrend. Broken resistance now becomes support. There is sometimes a throwback or test of this newfound support that can offer a second chance to partake in the renewed uptrend.

Chart 7

TELECOM LEADERS... Chart 8 shows AT&T (T) breaking triangle resistance over the last few days. After forming a triangle in August-September, the stock broke resistance with a surge over the last few days. Notice that upside volume was strong two of the last four days. Chart 9 shows Centurytel (CTL) breaking above its summer highs on good volume and recording a new 52-week high today. Chart 10 shows Verizon (VZ) bouncing today, but the stock is lagging both AT&T and Centurytel. VZ formed a falling channel the last two months and remains below channel resistance. All three sold off with the stock market in the final hour. This shows that they would not likely be immune to a general pullback in the stock market.

Chart 8

Chart 9

Chart 10