The S&P has been killed in the lead-up to the FOMC event.
It may get rough today with the FOMC Minutes due up at 2:00 ET.
I didn’t think the Fed would increase short-term rates by 0.75 points, but it seems like that is what the market is pricing in now (see graphic below in the Technical Edge section).
We are entering what could be a very rough period, but at the same time, I think there is a real possibility of a “Fed rate-decision rally.” And why not?
The ES has sold off almost 500 points from the 4204.75 Memorial day high down to yesterday’s low at 3708.50, which averages a near-1% loss per day over the last 11 sessions — that’s an average loss of 45.1 points per day (and don’t forget, 3 of those 11 sessions ended higher).
There was a well-known trader in the Market Wizards book No. 1 with a guy by the name of Ed Seykota. Ed made a lot of money in the S&P, but you know what? Ed bought or sold — he didn’t watch. He also had a rule that said, “you are supposed to trade up to the event, but not the event.”
I think that was right many years ago, but a lot of the well-known old-timers would fall off their chair if they saw the ES drop 150 points in a day. Well, we know that’s not going to be the case for today.
The ES has dropped 500 points in two weeks with most of it over the last week. Many times, traders get short before the event, and the markets rally in everyone’s face. The CME index futures are loaded with buy stops.
Will a rally last? To tell the truth, the ES didn’t act bad on the close. The ES could be targeting the 3840 to 3860 zone. If not, under 4710 should be a waterfall.
The ES rallied up to 3807.50 at 2:15 am ET, up 54 points, and opened Tuesday’s regular session at 3770.75, up 17 points. After the ES traded down to 3747 in the first 10 minutes, it rallied up to 3782 over the next 20 minutes (down 24, up 35).
Over the next 35 minutes, the ES sold back off down to 3733.50, cracking the prior session’s low. It was back and forth chop after that. Up 30 points at 10:45, down 30 points a half-hour later. Then up 22 points, down 27 points to new lows at ~3728 at 12:30.
We are becoming “blind” to these big ranges, but from the low, the ES rallied 40 points — a 1% move on the ES! — up to 3767.50 at 1:15. That was followed by a 38-point fall, a 20-point rally, then another 40-point fall down to the session low at 3708.50 at 3:15.
The ES traded 3750 as the 3:50 cash imbalance showed just $125 million to buy, and traded 3742.50 at 5:00, down 15 points or -0.40% on the day. That’s a lot of back and forth for just 15 points.
In the end, it has been a very painful ride for a lot of folks — it’s a pain game like no other. In terms of the ES’s overall tone, it has become very clear that buying the dip has fallen out of favor. In terms of the ES’s overall trade, volume was lower than Monday but still elevated at 2.67 million contracts traded.
Daily Range: 99 points
NYSE Breadth: 60% Downside Volume
NASDAQ Breadth: 50% Downside Volume
Today we have the Fed. A couple of days ago, it was assumed the Fed would raise rates by 50 bps. That quickly changed, as the market is now pricing in a very strong likelihood that the Fed raises by 75 basis points, with a small, small (lotto-like) chance they raise by a full point.
Game Plan — S&P 500 (ES and SPY), Nasdaq, Bitcoin, AR
The S&P made new 2022 lows on Tuesday but tried continuously to find its footing, suffering just a small loss on the day.
We were right not to trust the market’s gap-up, as it went on to retest the closing prints, then break the lows. It’s so hard to trust a gap-up in a downtrend.
Remember how FOMC days go. They like to run the stops on both sides.
S&P 500 — ES
I can’t emphasize this enough: When things speed up, we must slow down. When it gets noisy, we must quiet down. Traders need to be like a keel on a sailboat, looking for stability amid increasingly choppy waters.
Sorry to get all philosophical on you, but it’s the truth! When things get complex…we need simple!!
Coming into Monday’s gnarly gap-down, that was what we preached: Simplicity. Either 3807 (the prior low) was going to hold or it wasn’t. It didn’t and now yesterday it was resistance.
So let’s keep a darn close eye on this level today. If we reclaim it — and thus go daily-up — bulls must hold and defend this level. If they do, Monday’s high could be an upside target near 3875. That’s followed by the gap-fill near 3896 and the 10-day. We would need a strong-post Fed rally to get there.
On the flip side, bears need to defend 3807 and will look to break 3735 to 3740 on the downside — that’s Monday’s low and the Globex low. If they do, Tuesday’s low near 3708 is in play.
S&P 500 — SPY
Look at that chart. We’ve had so much pessimism and negativity, I can’t see how the market hasn’t discounted most or all of what the Fed will do.
The $370 to $373 area has proven to be key on the downside. A break and failure to rally opens us up to more downside and potentially puts the $350s in play (although not today, IMO).
Over $378 puts $380 to $381 in play. Above that zone and we could go on to fill the gap up near $390.
Move level to level and most importantly, keep it simple.
Nasdaq — NQ
The NQ wants to get back over 11,500. If it does, 11,850 could be in play, followed by the declining 10-day moving average.
On the downside, 11,350 has been key this week. Below puts 11,230 to 11,250 on the table.
Nasdaq — QQQ
Looking to open higher by about 1% currently, be careful of a fade back below yesterday’s high at $278.66. In fact, if we open just above that level (between $278.66 and $279) and fade right off the bat, cash-flow traders could look for a quick short back below yesterday’s high and use the high of day as their stop.
I’m not sure how far we may dip, but I wouldn’t be surprised if this gives traders a decent cash-flow day trade ahead of the FOMC event. I only suggest it because the risk would be so well contained.
Otherwise, over $278.66 opens the door to $280, then this week’s high at $282.34. Above that and the gap-fill is possible near $288.
Go-To Watchlist — Individual Stocks
*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.
Italics show means the trade is closed.
DXY / UUP — I am down to just ¼ of a position here, as the response in the USD has been fantastic. One of the lone bright spots in a sea of red. → Can hold for a higher push here, potentially into the FOMC event, and use a B/E stop or cash out completely. $28.50 to $28.75 would be the final target area on this tranche.
Relative strength leaders (List is cleaned up and shorter!) →
Disclaimer: Charts and analyses are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!