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After a nice rally a week ago, major stock indices have stalled and vacillated in a sideways pattern for the past few sessions. With just a week until Federal Reserve officials meet again to discuss interest rates and the economy, expect the sideways action to continue. That could change if if officials make comments prior to the meeting about their intent.

Wall Street expects members of the Federal Open Market Committee will raise interest rates another quarter percent at that gathering. But a few traders are concerned that the Fed could be more aggressive and go with a half-percent hike. Odds of that are slim, but it would probably send stocks plunging again. If the FOMC takes the expected action, the markets will likely continue the upward reversal of the really nasty recent correction.

The statement released after the last meeting included this paragraph:

“The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.”

The underlined portions are those that imply Fed officials are likely to vote in favor of another increase. Economic reports released since the last meeting show that while inflation might not be growing, neither is it decreasing.

Below is a year-to-date chart of the Nasdaq. The daily price activity is represented by candlesticks. (I’ve included an explanation of candlesticks below, if you’d like to know more about them.) The red candlesticks shows days when the market declined and the white or open candlesticks show advancing days. Notice that in spite of a few days with significant swings, the Nasdaq is still about where it was two weeks ago. The gold line is the Dow, included for comparison.

The bottom portion of the chart is a Moving Average Convergence Divergence (MACD). It shows that market momentum has switched to the positive side, but barely so. It could quickly turn negative again, as occurred the first couple of days in June.

We could see more day-to-day volatility over the next week with indexes up big one day and down big the next. But when the Federal Reserve meets on the 28th and 29th, I expect the major indexes will be just about where they are right now.

Candlestick Components

When first looking at a candlestick chart, the student of the more common bar charts may be confused; however, just like a bar chart, the daily candlestick line contains the market’s open, high, low and close of a specific day. Now this is where the system takes on a whole new look: the candlestick has a wide part, which is called the “real body”. This real body represents the range between the open and close of that day’s trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the opposite: the close was higher than the open.

Just above and below the real body are the “shadows”. Chartists have always thought of these as the wicks of the candle, and it is the shadows that show the high and low prices of that day’s trading. If the upper shadow on the filled-in body is short, it indicates that the open that day was closer to the high of the day. And a short upper shadow on a white or unfilled body dictates that the close was near the high. The relationship between the day’s open, high, low, and close determine the look of the daily candlestick. Real bodies can be either long or short and either black or white. Shadows can also be either long or short.