The markets chopped back and forth all morning anticipating this afternoon's FOMC announcement. When the announcement finally hit the wires, the markets dropped a bit and the standard analysis was that traders were disappointed with the Fed's Operation Twist. But operation twist was telegraphed plainly to the markets over the past few weeks; I think that news was “baked into” the market’s pricing. So the market sold off on the news (buy the rumor; sell the news).

I think the first reaction of analysts was to study all of the details concerning Operation Twist, but then they stumbled onto some unusual Fed language: “Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.” In my experience, the Fed has always used very obtuse and measured language that keeps everyone guessing the real meaning. But “significant downside risks” is pretty plain and strong language. That may be what led to the flurry of selling in the last hour of trading today.

SPX lost $35 to close at $1167 while RUT closed at $665, down $25. Trading volume spiked upward with 3.9 billion shares of the S&P 500 stocks trading today, well over the 50 dma. Trading volume was also up on the NYSE and NASDAQ, with increases of 32% and 13%, respectively. Today’s big drop took the major market averages back near the middle of the trading range we have been in for the past six weeks or so. Will we retest the lows of early August?

I took this opportunity to close the Oct 770/780 calls in my RUT Oct iron condor, leaving the 500/510 put spreads in play. I have been forced to hedge the call spreads several times over the past few weeks, so when I had an opportunity to close those spreads for a profit, I took it. Presumably, I will have an opportunity to reposition those call spreads farther OTM later this month. At that time, I will also roll the put spreads upward and confirm most of those gains.


So now we watch for clues: Retesting the lows? Breaking through to a full fledged bear market? Bouncing back and staying in this trading range?