There's a well defined bullish, or ascending, channel that has been guiding the Dow Jones Industrial Average ($INDU) higher. A breakdown in the channel might very well mark the end to the upward trend in place since March.

The Dow just can't seem to get, and stay, above 13,000. It's been trying for a few weeks now and just keeps failing. If it can't go any higher, might the Dow go lower? That's what I'm wondering.

Notice how the Dow's been clinging to the lower-end of the channel, or diagonal support, since last week. Going into next week, I'll be watching this line very closely. From my perspective, a breakdown below 12,800 could pave the way to additional downside. Confirmation would come on a drop below 12,700.

The set-up in the Dow dovetails with two other patterns I've been following. Both Fannie Mae (FNM) and the Financials Select Sector (XLF) are on the brink of breakdowns. Cracks in these two should eventually drag down the Dow.

Apple (AAPL) is powering higher without hesitation. It's a truly amazing bullish trend on display in the stock. AAPL seems destined for $200 in the next few weeks.

APPL has risen from about $115 in March to today's highs near $187. The stock's aggressive ascending channel has served as support and resistance during the climb higher. The channel can be used to manage the position going forward. Simply let your profits run until the channel breaks.

Many traders are wondering if the lows are in place. With the Dow Jones Industrials ($INDU) up by about 400 points in the last two days, after having rebounded from 11,800 for the third time, I think it's a good question to ask.

Yesterday we looked at the FXY as a proxy for risk in the market. The FXY is an ETF that tracks the Japanese yen and U.S. dollar exchange rate. Quite simply, a rollover in the FXY and follow-through to the downside would lend credence to the rally in stocks.

Today, I want to examine the Volatility Index ($VIX), commonly referred to as the VIX. The VIX is a measure of fear. The higher the index the higher the level of fear in the market place.

The VIX traded up to about 35 yesterday, which is pretty high. While most traders focus on the absolute high of the VIX, I like to view the overall trend. What I see in that trend is still a pattern of higher lows; put another way, the VIX is still in an upward trend.

I'd like to see the upward trend broken in the VIX before becoming more bullish on the market. A break of trend would occur if the VIX dropped to 24. Such a drop might make me incrementally more bullish on the market. I might be looking to get about 25 percent long in the current market environment. If the VIX were to drop to 24, or lower, I might increase my net long exposure to between 50 and 75 percent.

In the meantime, what the Fed says and does this afternoon is all that matters.

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).

The broader market has been recovering nicely from its deeply oversold condition over the last six trading days. But the market's reaction to Fed's decision Wednesday afternoon should determine the next directional move in stocks.

The Dow Jones Industrial Average ($INDU) finished the day with a solid gain. The Dow has been working its way higher along a narrow bullish channel over the last six trading days. The channel should break in one direction or another tomorrow afternoon.

Watch the 12,500 level tomorrow. It should serve as a price magnet, holding the Dow in place, up until 2:15 PM EST. A clear break above this level could be used as a sign to get long some of the bullish continuation patterns we've been highlighting. Conversely, a breakdown from the short-term channel could be used as an entry into the many bearish continuation patterns we've been analyzing.

Whether the market breaks higher or lower depends on the Fed...