Our View
I want to be optimistic. I want the market to rally and everything to go back to normal…but that’s not going to happen.
Today the Federal Reserve will likely raise interest rates by 50 basis points with a promise of more to come. We know the news on inflation is bad and that the Fed is behind the eight-ball.
There are a lot of unanswered questions and while we may get more clarity from the Fed, resolving the inflation issue is a very long way off.
Yesterday famed trader and hedge fund manager Paul Tudor Jones was critical of Fed chair Powell and said he does not envy the tough position that he and the Fed are in. In fact, Jones went on to say that he would not own bonds or stocks at this juncture and that capital preservation is more important now than ever. That really says something.
I am hearing more people say that the ES is going to bottom after the Fed. While I can not say it’s impossible, I can say it’s not very probable.
The biggest challenge for traders is and will be deciphering “real buying” vs. short-covering. The ES rallied 500 points during the last big short squeeze and there’s no doubt about it: It sucked traders in, only to see an even larger reversal lower.
Our Lean
Even after the last two days of going up, there is no way anyone can say the charts look good. To me, it’s clear that the trend is still down.
Maybe not this morning, but the 100 to 150-point ranges are back and so are the 50 and 70-point rips and dips. We’re staring down the worst four-month start to a year since 1939. The question is, with the rate hike already priced, how will the market react?
Our lean is two-fold: Sell the early rallies and buy the pullbacks in the first part of the day, and flatten out before the announcement. Second, MrTopStep has a trading rule that you are supposed to fade the first move after the decision hits the tape.
My guess is we are going to see some very big two-way flow today. My gut says we ultimately go higher after the rate hike, and if so, I am looking at the 4230 to 4250 area.
On the downside, I’m watching 4135 to 4140, 4120, and 4100. Below 4100 puts the 4056 low on the table.
Daily Recap
It was a sloppy day on Tuesday in some pre-Fed chop! The ES traded down to 4129 on Globex and opened Tuesday’s regular session at 4156, about flat from Monday’s settlement.
The ES chopped between 4145 on the downside and yesterday’s high at ~4166 on the upside. At 11:00 it resolved higher, popping 25 points in 15 minutes on its way to climbing to the session high of 4195.75 shortly after 11:30.
After the new high, the ES pulled back 30 points and found support at 4165 — prior resistance from the morning. Just before 1:00, the ES rallied 27 points up to 4193 and made a lower high, then fell more than 45 points to the afternoon low of 4147 just after 2:40. That led to a near-40 handle rip into the final hour, with the ES topping out at 4186 at 3:10 — another lower high.
After the push, the ES fell another 32 handles to ~4155 and entered the 3:50 slow near 4161. The cash imbalance showed $1.1 billion to sell and the ES rallied higher by 10 points into the close, closing at 4170.25 at 4:00 and settling at 4174.25 on the 5:00 futures close.
The ES finished the day higher by 18 points or 0.44%.
In the end, it was all programs firing off on the up and downside all day. In terms of the ES’s overall tone, it was firm but it didn’t go without some 50-point drops. In terms of the ES’s overall trade, volume was steady all day at 1.63 million contracts traded.
- Total Range: 66.75 points
- H: 4195.75
- L: 4129
Technical Edge
- NYSE Breadth: 72.3% Upside Volume
- Back-to-Back weeks of 80%+ downside volume
- NASDAQ Breadth: 63.3% Upside Volume
- VIX: ~$29
Today’s the day when the Fed will almost surely raise rates by 50 basis points. If it came out of left field, it would be a pile-driver for the equity markets. But this 0.5% hike has been well-telegraphed by Powell & Co.
Will they thread the needle and curb inflation without hiking us into a recession?
Maybe if I were an economist, I’d have a better guess — or perhaps not!
Either way, I’m just a guy who looks at the charts and tries to find attractive risk/reward setups in leading stocks and trades the S&P 500 and Nasdaq. There’s no need to overcomplicate it.
Game Plan — S&P, Nasdaq, Bonds, Individual Stocks
The 50 bps hike is all but priced into the market. I am looking for a bounce at some point, but it has been slow to get started. Is that a concern? Kind of. But for now we just continue to follow the clues.
That said, the best part of trading the two-way action? We are reacting rather than predicting. In a high-volatility environment, predicting can get us (and our accounts) into trouble.
S&P 500
The 4130 to 4150 area has been significant lately. Not a line in the sand per se, but notable for sure. If we lose last week’s low at 4119 — and thus that 20-point range of significance — it opens the door back to 4101, then this week’s low at 4056.
On the upside, let’s see if we can clear yesterday’s high at ~4196. Above it could open the door to 4210 and the declining 10-day ema near 4230. That’s followed by 4250.
Keep in mind, we could fly all the way up to 4300, and that only gets us back to last week’s high.
Trading Fed days are usually tough. The pre-2 pm action tends to be choppy, while the post-Fed trade is volatile. Just remember, they love to run the stops on both sides and we have to be ready for both outcomes — bearish and bullish — even though we are leaning bullish.
SPY
How the SPY handles yesterday’s smaller range will be key to how it handles the larger range.
Meaning, a break of yesterday’s low at $413.36 and failure to reclaim it opens the door down to the $410 area, then this week’s low at $405.
On the upside, I want to see a push up to $420.50 — the 61.8% retracement. If it doesn’t reverse, the SPY can climb to its declining 10-day, then potentially $430 if it really has some gas in its tank.
Nasdaq — NQ
If the NQ can go daily-up over 13,185, it could put the declining 10-day moving average in play. Above that and it could really start to fly — especially if we rally post-Fed.
Specifically, the 13,500 to 13,700 area could be on deck. Near the latter, the 21-day comes into play.
If we look at the “bigger picture” levels, we could be talking about a move back to 14,000 for the NQ, then 14,250 to 14,300. However, that’s ~1,000 points from here. We’ll need a real boost in the markets to see that.
On the downside, daily-down below 12,968 that doesn’t reverse is a cause for concern. It opens the door down to 12,850 and to the low near 12,710.
Individual Stock Trades
Just watching our trades from yesterday for potential entries. With the Fed on tap and the VIX still elevated, there’s no need to rush anything else.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Numbered are the ones I’m watching most closely. Bold are the trades with recent updates.
- WMT → Watching for entry.
- MCK → Watching for entry.
Relative strength leaders (List is cleaned up and shorter!) →
- AR
- WMT
- PEP
- KO
- MCK
- BMY
- JNJ
- DLTR
- DOW
- VRTX
- XLP — Consumer Staples
- PG
- COST
- MAR
- PANW
Economic Calendar
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
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