Courtesy of John Nyaradi.

Dow Jones Industrial Average takes wild roller coaster ride on Federal Reserve news

The Dow Jones Industrial Average (NYSEARCA:DIA) dropped 181 points, 1.16%, on Friday but still squeaked out a 0.5% gain for the week.

The S&P 500 (NYSEARCA:SPY) fell 0.7% on Friday and gained 1.3% for the week.

The Nasdaq Composite (NYSEARCA:QQQ) lost 0.4% on Friday but finished the week with a 1.4% gain.

However, all of the big news came on Wednesday when major U.S. stock indexes blasted higher on the back of the Federal Reserve announcement that the quantitative easing taper had been postponed.

The Dow Jones Industrial Average (NYSEARCA:DIA) closed at 15,529 on Tuesday, September 17th and then the roller coaster started after the Fed announcement on Wednesday as the index rocketed between a low of 15,470 and high of 15,709 to close at 15,676, a high to low swing of 239 points.

However, as the week wore on, the Fed induced pop wore off and the Dow Jones Industrial Average (NYSEARCA:DIA) settled on Friday at 15,451, below Monday’s close and 0.5% above last Friday’s closing price.

On My Stock Market Radar

chart courtesy of StockCharts.com

In the chart of the Dow Jones Industrial Average (NYSEARCA:DIA) above, we can see how the index rocketed to new levels and now has fallen back to create a double top resistance formation just below the 15,700 level.

Overbought conditions have declined with RSI dropping back into the 50s on the late week action, and upward momentum is also slowing.

Last week was much like many recent weeks in which market action was “all about the Fed, all the time,” and Dr. Bernanke’s Wednesday surprise announcement regarding “taper off” was a blockbuster.

There are several ways to look at this change in Fed direction.

1. It could be good news for global markets as they have become totally addicted to easy money from the Federal Reserve.  Much of the last four year rally has been labeled “The Bernanke Rally” and so “taper off” could mean that the party will continue.

2. It could be bad news for the economy as the Fed continues reducing its growth forecasts and leaves the full quantitative easing in place to offset fears of recession or deflation.  Can the U.S. economy survive without quantitative easing and zero interest rates?  What is the Fed afraid of?

3. It could be bad news for the Fed, financial markets and the global economy as perhaps the Fed has put itself in a box from which there is no escape.  If they taper, interest rates are likely to rise which could further slow the economy or trigger a new recession.  If they don’t taper, they run a significant risk of creating bigger asset bubbles that will eventually correct regardless of Fed action or inaction.

4. It could be bad news for everyone as the Fed seems to have no real plan or timetable regarding what to do next.  For months, Dr. Bernanke and his colleagues have been conditioning markets to the idea of a taper of quantitative easing and then confused everyone on Wednesday when they didn’t carry through.

Further confusion came later in the week when Fed Presidents James Bullard and Esther George offset Wednesday’s decision with comments that the taper could come as soon as October (Bullard) and that it was a mistake and a credibility hit not to taper. (George)