Here’s the trading game plan
PRE-OPEN MARKET COMMENTS FED-DAY 9:00 AM ET – The S&P 500 has dropped 10% in the last week. Most analysts are projecting a 75 basis point Fed rate hike today and that would be the largest increase in decades. I don’t predict market reactions to the FOMC statement and even if I had the release in my hand ahead of everyone else, I wouldn’t know what to expect.
Normally, less is better when it comes to the market and interest rate hikes. Given that line of reasoning, a 50 basis point rate hike would be bullish. Unfortunately, the Fed has grossly miscalculated inflation to this point and the market feels like they are “behind the 8-ball”. If they do not raise 75 basis points today the fear is that they will not be able to rein in inflation and that more aggressive tightening will be needed the rest of the year. A 50 basis point rate hike would also suggest that economic growth is not strong enough to shoulder a 75 basis point rate hike.
A 75 basis point rate hike would signal that the Fed is going to aggressively tame inflation. A move of that magnitude would raise borrowing rates and it could lead to a recession.
Don’t waste your time trying to pick apart the statement and the reaction. We are going to see some wild swings and the reaction today could be reversed tomorrow.
After a 10% drop in a week, I am expecting a small relief rally. There are some huge gaps that need to be filled and sentiment has soured quickly. I believe that any bounce will present a shorting opportunity once it stalls. The yield curve has inverted and many analysts are pricing in the likelihood of a recession. If the Fed only raises 50 basis points today, the fear will be that they hike 75 basis points in July. That possibility will also keep a lid on the relief bounce. Since the market is pricing in 75 basis points, the Fed is likely to give the market what it expects.
What are Asset Managers likely to do? There is not one Asset Manager that believes this will be their last opportunity to buy stocks at this level. The downward momentum is set and they will wait for Fed tightening to stop. During that time, they will be evaluating economic data points to see if growth is slowing. Job growth has been strong to this point and it is the key metric to watch. Initial jobless claims are released every Thursday. This number will be of great importance and it is current. A steady week-to-week increase in initial jobless claims would not be well-received by the market.
Swing traders should remain sidelined. Why aren’t we shorting if we believe the market is going lower? That is a valid question. This analysis is geared towards swing traders with a trade duration that spans 3-4 weeks. The market is very choppy and most traders with that time horizon tend to be “long only” (they only trade the long side). We did take a short a few weeks ago and we were whip-sawed out of a good position. The snap back rallies have been violent and this market should only be traded by active traders who can watch during the day. Now that dip buying has dried up, the downward momentum will accelerate. The Fed will do everything in its power to prevent a market meltdown and that includes making statements like, “We are seeing signs that inflation is abating.” There might not be any truth to that statement, but it will spark a massive short covering rally. For maximum effect, they will time those statements to coincide with options expiration. This is not my first rodeo and in the last 30 years I have witnessed this many, many, many times. This is how it works and statements like this are in the Fed’s toolbox. With all of this in mind, we are going to wait patiently for our opportunity to set up. It might take a few months, but when our time comes, we will be active for a long time and there will be bargains.
Day traders need to make money early today and they need to reduce their activity after 3 hours of trading. The S&P 500 futures have been able to test the high from Tuesday and it looks like we could see a little rally ahead of the Fed. I would not chase this bounce. Wait for 30 minutes to see if the bounce has any “teeth”. We want to see a move through the high from Tuesday on the first attempt and we want that support to hold. After a massive drop in the last week, I believe the odds of a relief bounce are high and we will fill in some of the gap from Tuesday. Tread cautiously trading the bounce and know that you are trading against the longer term market down trend. That means you have to be passive with your targets. If you get on the wrong side of a long, YOU DO NOT HAVE THE LATTITUDE TO HOLD LOSING LONGS OVERNIGHT!!! That means you have to keep tight stops and focus on stocks that have excellent D1 charts, heavy volume today and technical breakouts. If the market struggles to get through the high from Tuesday in the first hour of trading, we are likely to chop ahead of the FOMC statement and there will be opportunities on both sides. Trading after the statement is risky. Watch the action for the first 30 minutes and wait for the press conference. Stacked consecutive candles of a single color with no overlap will indicate which way we go.
Support is at the low from Tuesday and resistance is at $380.