Focused On The Fed
The broad market's recent pullback these past two days is considered bullish. No chart can climb straight up and sustain vertical moves without crashing to the floor. Price action needs a strong base of support to build upon, no different than any other structure known to man.
Up-volume last Wednesday was huge while today's decline came on mild volume instead. Also bullish. Not to mention the fact that we are in the final three weeks of a calendar year where mutual fund managers haven't performed equal to the markets and are desperate to do so. At least if they want to keep that second house in the Hamptons and a third in the Keys.
Plenty is hanging on the Fed's announcement tomorrow. The entire financial world has already accepted another rate cut as fact. Whether that's true or not remains to be seen. I've "ass u me d" many things in my life that surprisingly enough, didn't quite happen as planned. Has that ever happened to you?
Popular thought is that the Fed's wording has more merit than action, and that may be partially true. Biased bulls could conjecture that waning or no further cuts means the recession cycle is nearing its end according to Federal (gu)estimation. Fed- speak saying that the economy remains in question and vigilance is required would also suggest more cuts are coming besides.
But what might words saying the economy is expected to turn sometime in 2002 but overall growth to remain muted compared with recent past? How about no rate cut and words such as this? Would the bullish masses shrug it off as good news if the needle isn't injected a record 11th time in one year to the pulsing vein awaiting its fiscal fix?
Only time will tell.
(Weekly/Daily Charts: SPX)
The S&P indexes are just now showing signs of weakness in long- term charts. Weekly stochastic values have held above overbought extreme since October from the bullish ascent in September. If that slow line (red) breaks down tomorrow, it's time to lean toward puts or shorts as high-odds plays.
Daily charts confirm pending weakness as price action rests near support while overbought extreme readings turn bearish. Bulls would want to see such action near resistance, not support. Will said support levels hold if/when stochastic values reach oversold extreme from present?
(Weekly/Daily Charts: Dow)
Same for the Dow, but lagging S&P indexes on oscillator weakness. If support breaks here I'd be looking for next levels lower, which right now seems near 9,500 where 50 DMA (pictured in the weekend Wrap) resides.
(Weekly/Daily Charts: QQQ)
The NDX/QQQ didn't change a whole bunch today, and is holding up better than the Dow and S&P indexes respectively. However, downside pressure is clearly building and a catalyst in that direction could see prices testing 38 area (at least) real soon.
(60/30 Min Charts: OEX)
Revisiting the expanding bearish wedge depicted last week in one of my Wraps (Wednesday?), we noted that the rally stalled right at resistance and never recovered from there. Hence, the next logical move was lower to support. With rising daily chart signals I did not trust the downside for swing trades and laid off OEX puts near a break below 596 in the upper pattern. That would have been good for +/- 15 OEX points or +/- 30 SPX points profit Since Thursday morning and possibly more to go. My mistake: should have risked a small play based upon the chart pattern and stochastic values alone, but the lesson learned is valuable in itself.
Can we still use this information of any value? Yes. If price action breaks below the lower level from here with long-term charts turned bearish, there could be even more room to run.
This pattern is about 25 index-points in width from 600 to 575. If it breaks, the downside projection is equidistant from the point of failure. A break below OEX 575 would target 550 area as next reversal, or 25 OEX points of profit lower. Double that for the SPX whereas a break of SPX 1120 suggests a halt near 1070 below there.
Tuesday afternoon could be a very pivotal time. If these markets get surprised it could begin the next trip to support from very extended levels. More bullish news could fetch new buying to assault recent highs once more. Staking positions either way ahead of the news is pure gambling where one wins, one loses and a strong case could be made for each right now.
As noted for the past two weeks, if forced to pick direction at gunpoint I'd wager the downside but wouldn't commit big money to it. Seldom has there been periods where I just couldn't commit (right or wrong) either way and we've been in one such stretch for awhile, but may be ending soon. If weekly charts tip over in bearish fashion on a late-day selloff Tuesday, it's time to test the downside once more. Charts have been hinting for days now and confirmation could be at hand. We'll ignore what we hear, trust what we see and eschew falling in love with either direction as always!
Best Trading Wishes,