The market is close to confirming a 123 bottom or breaking down from a bear flag. The conclusion to this confluence of patterns will dictate trading over the intermediate-term.

The market has spent the past six sessions trading in a very tight pattern. The Dow Jones Industrial Average ($INDU), for instance, has been gyrating around the 12,600 level, plus or minus 100 points.

Sticking with the Dow as a measure for the broader market, it has rallied by about 1,000 points from the mid-March low. The Dow has done so in a very tight, aggressive, short-term ascending channel. This channel serves as the support and resistance for a bear flag. A breakdown from the bear flag would be defined with a drop below 12,500; confirmation of the bear flag would come on a drop below 12,200.

Meanwhile, the March low is higher than the mid-January low, keeping the prospects for a 123 bottom alive. Horizontal resistance is clearly defined in Dow at 12,750. (You can find other well-defined resistance levels across other broad market averages.) A breakout above resistance would set the stage for a big rally.

One of the two patterns will probably break by the end of the week. Look to get defensive if the Dow breaks down from the bear flag. Alternatively, look to get bullish if the Dow breaks out above horizontal resistance, confirming the 123 bottom.

We're going to conduct a simple macro analysis of a couple of financial markets. Doing so will help you to chart a course after the Fed's announcement on interest rates this afternoon and to define action points.

As we pointed out yesterday, the Dow Jones Industrial Average ($INDU) is going to gyrate around 12,500 today. The market won't move a whole lot in between now and 2:15 PM EST.

The Fed

There is a 100 percent chance of a 25 basis point cut. If the Fed cuts by 25 basis points, then the market is likely to pullback on profit taking. It's simple, the Dow is up by over 800 points in the last seven trading days.

There's about a 50 percent chance of a 50 basis point cut. If the Fed cuts by 50 basis points, then the market is likely to continue higher, led by the Dow breaking above 12,500. 

The Banks

The banking sector, as defined by the Banks Index ($BKX), has staged a nice recovery since the Fed staged its emergency rate cut last week. But the BKX is running into descending resistance and previous support, both of which are converging at the 90 level.

The BKX at 90 is analogous to the Dow at 12,500, where a breakout above short-term resistance should see some follow through in the coming days. Both the BKX and Dow will need a 50 basis point cut to breakout. Alternatively, a rollover from short-term resistance will most likely occur if the Fed cuts by 25 basis points.

The Long-Term Rates

While the Fed is set to cut short-term interest rates, by either 25 or 50 basis points, it remains to be seen what impact this has long-term interest rates, as defined by the 10-year Treasury Note Yield ($TNX). The TNX is right back to 3.8 percent, which was previously a big support level. It's now resistance. A breakout in the TNX would be good for stocks, but a rollover would not.

The Dollar

The U.S. Dollar Index ($USD) should be a lot lower, but it's been holding up at relatively higher lows over the last few weeks. The USD broke below 75 in November, but has been holding above that level so far this year, possibly tracing out a 123 bottom.

A stronger greenback would put pressure on stocks, so look for a dollar rally following the Fed announcement to possibly cause a rollover in stocks. Alternatively, a breakdown in the USD might help the BKX and Dow, and other stocks, to breakout.

Summary

Look to some of the stocks emerging from bullish continuation or reversal patterns if the market rallies following the Fed's announcement.

Some of the bullish stocks that we've been highlighting include:

QLogic (QLGC), Cleveland Cliffs (CLF), Marriott (MAR), the DB Commodities ETF (DBC), and AKSteel Holding (AKS).

If the Fed delivers a 25 basis point rate cut and the market rolls over, look to some of the bearish continuation patterns that are on the verge of breaking down.

Some of the bearish stocks that we've been following include:

Intercontinental Exchange (ICE), Goldman Sachs (GS), and KKR Financial (KFN).

We're expecting more day-to-day volatility this week, where the Dow Jones might be up 100 points one day and down 100 points the next. Our "friends" at the Federal Reserve will add to the volatility, when they make their statement on interest rates Wednesday afternoon.

We're sticking with an overall balanced outlook in this market climate, trading both bullish and bearish positions. But we're generally using smaller position sizes and tighter stops. When looking for bullish ideas, we're searching for one of two characteristics: relative strength or identifiable bottoms. When looking for bearish ideas, we're searching for well-defined bearish trends that are about to continue.

Cleveland Cliffs (CLF) - Bullish Wedge

CLF is tracing a big bullish wedge. The pattern is about six months old, but may need a few more months before it breaks. Horizontal resistance is well-defined at $105.

QLogic (QLGC) - 123 Bottom / Bullish Flag

Semiconductor stocks have been absolutely hammered in the bear market. The group is deeply oversold. But some stocks within the semi sector are showing signs of life. QLGC is one such stock.

QLGC has a 123 bottom if it can stay above $12. This bullish reversal pattern has formed over six months. In the short-term, the stock has formed a bullish flag. Look for a break above $14.50 to confirm the flag and a move above $16 to confirm the 123 bottom.

Goldman Sachs (GS) - Bearish Channel

It's been a while since we wrote about GS. We still think that the stock is important to the broader market.

The stock still hasn't reached its bearish price target of $150, which is very close to its August low. We're going to keep looking for GS to fall as long as it stays in its bearish channel. But if GS breaks out, to the upside, from its bearish channel, it's likely that the stock will continue to trend much higher. You could even argue that such a breakout would turn the bearish channel into a short-term bullish flag.

The set-up in GS is a good one to watch Wednesday, after the Fed announcement.

Intercontinental Exchange (ICE) - Bearish Flag

The news of merger talks between the CME and NYMEX could put further pressure on ICE. A very short-term bearish flag has formed in the stock which, if broken, could send it back down to recent lows in a hurry.

Volatility will be with us again Wednesday. Expect another massive gap lower thanks, in part, to Apple (AAPL).

The much-loved AAPL delivered a dismal earnings outlook, reinforcing the worries over a slowdown in consumer spending. AAPL is down by about 11 percent in pre-market trading.

Emotions will run high again today and we're likely to see some more wild swings in the broader market, so we're looking at a couple of patterns off the beaten path.

FXE - Double Top

We're watching the unfolding of a potential double top in the Euro Currency Shares Trust (FXE). This ETF tracks the EUR/USD exchange rate.

The FXE reveals that the dollar is weakening when it's trending up or that the dollar is strengthening when it's trending down.

Not a lot of people expect the dollar to strengthen, especially with the Fed on the offensive. But in our view, that's all the more reason to watch for a bullish reversal in the greenback vis-à-vis a breakdown in the FXE.

NITE - 123 Bottom

Shares of Knight Capital Group (NITE) are holding up remarkably well in this market climate. The stock started bottoming out back in October. NITE has since traced a higher relative low and broke above horizontal resistance at $14.75,completing a 123 bottom. Look for the stock to hold above resistance, which should now serve as support.

It's not quite there yet, but the beleaguered U.S. Dollar ($DXY) is 2/3 of the way to tracing out a 123 bottom.

The bullish reversal pattern is forming at a time when sentiment towards the greenback is at a new low. In other words, it's a good time to go against the grain for a trade.

You can trade a bullish dollar move by monitoring the DXY, but executing through one of the currency ETFs such as the FXE, FXB, FXF, FXY, or FXA. Of the five, the FXB -- the British pound versus the U.S. dollar -- offers the highest probability at the moment. But keep any bullish dollar try short and sweet.