What's in the Fed's wallet - as the dollar and VIX look ready to spring either way depending whether Fed's pronouncements support equities or US bonds

Will the Fed try to support U.S. Treasuries, or equities? or can it do both at the same time? As we head into Fed day tomorrow, many eyes are on the U.S. dollar, as well as equities and the VIX (as both the VIX and the dollar seem to be trying to put in a bottom). Both were heavy today, the dollar more so as the euro and the yen - and Treasury bonds (and TLT) moved up notably, while equities treaded water. Both the dollar and the VIX are under their 200-day moving averages, and possibly working on inverse head and shoulder patterns that haven't launched them quite yet. Bullish divergence does show in both charts (at right) - so we'll have to see whether the Fed does anything tomorrow to dampen those in an effort to aid equities. Of course, we'll be more concerned with effects than intentions!

The gold ETF (GLD) had an interesting day as it looked like it was working on a bullish engulfing bar, which goes along with the action as the dollar was heavy but euro and yen higher. However, GLD's action can also be interpreted as a "kissback" up to the broken trendline I've shown in the gold charts repeatedly (and again recently) as well as up to its 50-day moving average that it fell under yesterday. A move underneath today's low in gold should spell more weakness ahead for this precious metal.

The default P&F charts for the Dow Jones Industrial Average, S&P 500 and Nasdaq at Stockcharts.com are all showing lower targets, that go along with the 8000 level for the Dow Industrials. Swing traders may keep in mind that Terry Laundry's T Theory work indicates equities may get support at the levels reached today (853 for the SPX at its 55-day moving average). From an Elliott Wave standpoint, the bearish point of view is that we've another small first wave down to be followed by another larger wave down - and it's too soon for me to speculate whether Fed day will factor in by working on a small second wave consolidation first, or just give way to that next movement down.

The ChartsEdge weekly forecast will be interesting to consider for whether it points to a significantly higher move into later this week, or do those cycles only play out some level of pullback/consolidation before lower waves down. Then of course, there's still the June 26 "Bradley turn date" to consider - indicated as a cycle low in that model, but could theoretically "invert."

What about market internals? The big "damage" was done yesterday of course, as the percentage of NYSE stocks above their 50-day moving average fell drastically, and edged lower again today. In fact, in these past two trading days, that indicator has now dropped to almost touch its own 200-day moving average! (see chart at left)

The McClellan charts, courtesy of DecisionPoint.com via Stockcharts.com, show continued deterioration also of course. Those charts for NYSE and Nasdaq are below, with the markings I've been placing on them to help focus what they're telling us. Not only did the Oscillator edge lower, but check out the Summation Index in both - it made another notable drop lower. Not to the zero line which would be critical, but still it dims the prospects for the intermediate term (versus the short-term that's associated with the Oscillator). The index ratio (bottom indicator window) in both also edged lower under its zero line in both.

All in all, this makes me wonder even more than since the thought first really occurred to me some weeks ago - if the Fed and other significant participants in the markets had to "choose" between supporting equities OR treasuries - and in considering what effects their actions might have on the dollar - which way would they go? It almost seems as if policy makers are doing all they can to weaken the dollar nowadays - whatever their intentions might be, will they succeed? The dollar did not follow through with the strength typically associated with a bullish trap door pattern ... but it hasn't broken it either - yet! The dollar really pushed hard on its Bollinger Band midline (about the 20 day moving average) today. Tomorrow we'll want to keep a close eye on the dollar and on Treasuries to get more clues about where the financial markets may be headed next.