Futures are basically flat as today is “Fed Day.” I used to get excited way back when, as Fed Day typically entailed a lot of volatility and action, but it hasn’t been like that for awhile. For the last year or so there haven’t been many surprises, as Big Ben likes likes to telegraph where the Fed is going long before anything is released. It will be interesting to see if today is any different.
I think most expect Operation Twist for another three months (Twist 2.0), and that the Fed will remain accommodating. They will most likely express concerns over the economy and reiterate that they are ready to act if necessary because things continue to deteriorate, and they will also indicate a commitment to keeping rates low through 2014. If this is what comes out today, you should expect to see mild disappointment, but yesterday’s high of 1363SPX (our intermediate objective) will remain intact. Then the market will rest after its nice tradable move all the way from the 1266 lows. Remember, markets did rally about 80-90 handles off the lows. The Nasdaq is up around 12.5% and the S&P is up 8% YTD, which really is not so bad. A short rest would be constructive and lead to better patterns to trade.
Some actually think the Fed will become more aggressive and try to head off any more slowing data by and getting more creative and announcing some type of asset buy program like a QE3. There has also been talk of the Fed indicating low rates all the way through 2015. If that’s what is announced, Fed Day could gyrate the markets to the upside on a short term basis, and those rolling up shorts will exhibit more pain as the market takes out 1363. The next resistance level after that are 1373 then 1383-1385. After the initial squeeze through yesterday’s pivot, reality will set in and traders will begin to ask what the Fed knows and if things are really so devastating that they merit new easing. Then we sell off in the last hour or so tomorrow, which could lead to a rest or corrective action!
Either way, this is a spot to reduce some longs and perhaps start to hedge. Even if we complete the measured move of the Inverse Head and Shoulders pattern up to 1390ish, it most likely won’t be in a straight line and could be frustrating to trade. We just had a nice move – a very tradable move, and I never like to see guys chase. I also think if you’ve been rolling up shorts for the past few weeks you are trading based on what you think, and not what you see.
Disclosure: Scott Redler is long AAPL, LVS, SBUX, and BAC and short SPY.