S&P Short Squeeze, the Fed and the March Quad Witch

Timing is everything when it comes to trading the S&P 500 futures, and yesterday’s short squeeze proved the point. After the S&P sold off down to the 2033 level, the futures pushed back from the weakness in the euro late Friday and rallied over 16 handles in the final hour. After trading higher in Globex Sunday night and opening higher Monday morning on the 8:30 CT futures open, the S&P futures (ESM15:CME) rallied to the 2074.00 level, up over 40 handles from Friday’s close.

Perfect Storm

All sorts of things came into play during yesterday’s 1.4% rally in the S&P. The first was the S&P’s push back from the weakness in the euro. That set up the PitBull trading rule about a low being made the Thursday or Friday the week before the expiration and the March S&P statistics that showed yesterday, the Monday of the March expo, being up 21 and down 9 of the last 30 occasions (See all of the expiration stats here).  All acted as a perfect storm to the upside and it also fell into one of MrTopStep’s trading rules, “It takes days and weeks to knock the S&P down and only one to bring it back.” The S&P 500 rallied as the dollar took a respite on the upside with the euro closing up 0.70% to 1.0570. The rally in the S&P comes after the futures have closed lower 6 of the last 8 trading sessions. The Dow futures (YMM15:CBT) closed up 204 points or 1.3%. The S&P futures (ESM15:CME) closed up 26.75 points or 1.4% and the Nasdaq futures (NQM15:CME) closed up +1.19% to 4359.50. It was a big day for the stock market, but many traders we spoke to on the CME floor said they are still concerned with what the Fed has to say.

The Fed

There has been increased talk over the last six months about when the Federal Reserve will start to increase interest rates. After a big jump in the February nonfarm payroll numbers this month and some sluggish economic reports over the last several days, questions still remain about the timing of the interest rate hikes. The talk of a Fed interest-rate increase has weighed heavily on stocks over the last several weeks, sending bond yields higher and pushing the euro to a 12-year low. While investors remain concerned about the strength of the dollar, which has risen 14% against the euro this year alone, Europe continues to lower rates through its quantitative easing program, pushing the dollar up and making the United States less competitive for exports.

The Fed has stated many times that interest rates could rise as soon as June, but we don’t believe it will happen that fast. We do think September is likely. Today is day one of the Fed’s two-day meeting. It’s unlikely investors will hear much, but we do think the markets will react when the FOMC makes its announcement, its forecast and the chair press conference that follows at 2:30 PM Eastern time on Wednesday. After such a big move up, we think it’s possible today’s trade will be quiet.

In Asia 9 out of 11 markets closed higher and at 6:00 CT in Europe 9 of 12 markets are trading lower this morning. On today’s economic calendar areday one of the Fed FOMC two-day meeting, housing starts and Redbook.

The S&P tends to go sideways to lower after a big up day

Our view: Personally I don’t think this is a one-day rally. I think what the Fed has to say we already know. At some point in the future, this year, the Federal Reserve will attempt to raise interest rates, it has to happen eventually. One of MrTopStep’s trading rules is that the S&P tends to go sideways to lower after a big up day. That said, I don’t think everyone got out of their shorts yet. Therefore we lean to selling the early rallies and buying weakness. If the S&P futures can hold above 2072.00 area versus the June contract, I think there’s a good possibility it could trade up to 2083 to 2085.

S&P Cash Study for the March Expiration

See all of the expiration stats here…

As always, please use protective buy and sell stops when trading futures and options.

• In Asia 9 out of 11 markets closed higher: Shanghai Comp +1.55%, Hang Seng -0.20%, Nikkei +0.99%
• In Europe 9 of 12 markets are trading LOWER: DAX -1.62%, FTSE -0.06%, MICEX -0.16%, Athens GD.AT +2.43%
• Fair value: S&P -7.78 , Nasdaq -7.42, Dow -79.22
• Total volume: 1.69k ESM and 38k SPH traded
• Economic schedule: Day one of the Fed FOMC, housing starts and Redbook

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