Daily Market Commentary: Low Volume Breakouts

In the run up to today's Fed announcement, markets made an early break past resistance - following the S&P's lead, which made its break on Monday.

The semiconductor index posted the most significant move, as it was able to close at a new multi-year high. The gain was enough to reverse the bearish cross is +DI/-DI (although with a weakening ADX, the importance of such a cross is reduced).  The break is also good news for the Nasdaq and Nasdaq 100, as they seek to make new multi-year highs of their own.

Suffice to say, the Nasdaq did post a breakout: stops go on a loss of the 3,387 swing low.

Naturally, the breakouts have reversed some of the bearish markers in breadth indices, although these same metrics remain close to - or at - overbought territory.  There isn't much room for these to go higher.  Interestingly, the Nasdaq Summation Index changed little despite the good move in the parent index: if trading using this breadth index, then you wouldn't be a buyer here.

The Russell 2000 had the best of the primary index action: it gained over 1% in a move which took it close to a new multi-year high too. Those looking for volatility trades (option traders) would do well to focus on this index.

Action is likely to be light until the Fed makes its pronouncement. With breadth as overbought as it is, there is a risk we could see substantial 'bull traps' generated by yesterday's breakouts. An option spread is probably the best play in these conditions, because if the Fed announcement is greeted positively, it will likely cause a flurry of short covering trades. And naturally, any downside will be quick and fast - as is typical for 'bull traps' (+ overbought conditions).


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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com. You can read what others are saying about Zignals on Investimonials.com.


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