So Far So Good as We Wait for the Fed

The open is strong, with advancers over decliners by 3 to 1 on the NYSE and almost 4 to 1 on the NASDAQ. Still, we are encountering resistance at the S&P 500 Index Futures overnight high, with support at yesterday’s high.

There was no immediate gap-fill, which was positive, but we may yet see the fill as we did on the mirror image of today occurring yesterday. It is not surprising to see the market tentative with the Fed announcement looming, but the market needs to hold yesterday’s high by the close to have a confirmed pivot higher in the cash session.

For now, technology leads this morning.

The NASDAQ 100 leads the indexes.

Keep in mind that there is still short-covering today, which might distort fund flows. The follow-through rally after a low retest is where the fund flow picture typically gets clearer.

Anyway, this could be a long day. I will comment as needed – but most of my commentary will be reserved for the Fed post-mortem later today.

A.F. Thornton

It’s Fed Day – Will The Market Bottom?

Navigator Algorithms – 100% Cash – On Preliminary Buy Signal

It is Fed day today, with the announcement slated for 2 pm EST. As you can see from the chart below, we are coming right into the nominal 20-week cycle low. Coincidence? Hardly. The cycles are certainly influenced by these meetings, along with quarterly earnings.

It was Microsoft’s turn to report last night. The initial market reaction was negative. But then management’s forward guidance was positive in the follow-up conference call. So both Microsoft and the futures market pivoted higher on the news.

And in an encouraging turn of events overnight, the S&P 500 Index Futures have broken above yesterday’s high, which would give us an actual pivot higher on the chart. As the price sits on the five and 200-day lines, there is some work left to do. Nevertheless, if the cash market follows through this morning, we have a short-term bottom in place.

I believe that the market will retest the low out a week or so. This morning’s pivot, along with a slight easing in 10-year Treasury Rates, indicates to me that the market is expecting the Fed to stay the course outlined in their last meeting. If so, the Fed will have tapered their Quantitative Easing program and are likely to start their first rate hike in March.

This so-called “Forward Guidance” has achieved the intended effect of taking the froth off the stock markets. From its December intraday peak to Monday’s low, the S&P 500 Index Futures had dropped -12.3%. The NASDAQ 100, which peaked in November, was down -18.3%. The Russell 2000 Small-Cap index futures have dropped almost 22% from the November peak.

The correcting stock markets impact the “wealth effect,” which will help ease the demand side of the inflation equation. Along with less deficit spending and the end of most Covid stimulus programs, the demand side of the equation could ease us into a recession if the Fed overreacts. Either way, demand will wane.

The supply side of the inflation equation is more complicated. The first best step would be to follow Great Britain and Ireland’s lead and abandon all the Covid mandates and policies. We can live with Covid, especially once the medical establishment restores the inexpensive, early treatments that Big Pharma sabotaged. Lawmakers must address Big Pharma’s regulatory capture at every level of our government health care system, and lawmakers must root the corruption out.

The vaccine mandates have wrecked and distorted the labor markets from top to bottom. At least one-third of the labor market will never get the experimental “vaccines.” These folks have exited the workforce or changed jobs, creating many of the labor shortages we are experiencing. Having left the workforce in many cases, these workers are not reflected in the monthly employment numbers.

The most crucial point is that the economy can resolve the supply side of the equation independent of Fed policy over time. The demand side of the equation is already tapering under the reverse wealth effect and inflation-driven price hikes.

Day Traders

We will open on a small true gap higher (always measured from yesterday’s high, not the close or settlement) after making overnight lows more than 100 points from the current price. Today’s open is the mirror image of yesterday. Gap rules are in play.

Yesterday’s high (4402.75 on the futures) is the only level that matters in terms of bull/bear sentiment today. Today will be more important than most in terms of whether or not there is a gap fill and/or subsequent acceptance within a lower range.

While there is sufficient shock and awe to this open, it is not unwise to trade later rather than earlier today, with the Fed announcement coming at 2 pm ET. Trade is likely to slow down as we get closer to that hour.

Substantial, one-sided moves in the market signify that traders may still be overly short. As always, focus on the gap fill as your first sentiment measure. This morning, the “ruling reason” is determining whether sellers see these higher prices as a gift or a curse.

Any failure to gap-fill or very tentative and slow tempo selling should be considered a buying opportunity. A reliable way to find a suitable location is to connect the highs from the high of the day should there be an early drive lower. Buy a confirmed break of the line.

While I’ve not listed any lower key Levels, traders should monitor yesterday’s Value Area High at 4340. Value was overlapping to higher yesterday. If traders have to cover more shorts, the price will not find acceptance anywhere inside yesterday’s Value Area.

A.F. Thornton

Closing Morning Call Trade

The Founders Group is closing our morning SPY Call Debit Spread trade for a nice gain. We entered at the Weekly Expected Move low at 427.25 and we are out for 10 points at 437.37.

We are still holding two long SPY Call Debit Spreads from yesterday. We don’t have a swing buy signal on the Navigator Algo quite yet.

A.F. Thornton

Bitcoin is the New Gold? Really?

Every bubble and mania has its rock star. Perhaps Bitcoin will fit the bill for this era. I love the technology, and I am sure Central Banks worldwide will eventually enjoy it for their currencies. But I never drank the Bitcoin Kool-Aid as a hedge or long-term investment.

Not that gold has been a rock star in the wake of the recent inflation spike. Perhaps that is further evidence that inflation will be short-lived. But gold is slowly rising – and the Russia / Ukraine situation may have as much to do with it as inflation. The Gold ETF (GLD) had the highest inflows in its history on Friday – nearly $1.5 billion. The fund started in 2004.

Thus far, Bitcoin has dropped in half from its peak and is more correlated to the stock market and “risk-on” assets than “risk-off.” Maybe the adage that the more things change, the more they stay the same still applies.

As always, my preference is to hold the real gold rather than a fund. Someday, there will be an accounting for “paper” gold that may show some shenanigans. In other words, there might be more contracts than gold to back them up. Only time will tell.

A.F. Thornton

It’s All Relative, Right?

Navigator Algorithm – 100% Cash – On Buy Alert

The markets will open down 2% this morning, but with yesterday under our belt, that is just a blip on the radar screen – no problem right? We have our big boy pants on now.

But in reality, price is retracing about half of yesterday’s spike low, so still in the realm of recovery. And I suspect there are a lot of shorts still out there hoping for a crash that will run for the hills on any strength today. Again, patience is a virtue for a good swing trade. We will see what the Navigator Algo telegraphs.

For day traders, I would focus on the spike base at 4346. There is potential for more short covering should prices get above it and find acceptance there.

Should sellers maintain control this morning, traders should note halfback at 4311.50 and the Volume POC / WEM low at 4275 or so, both of which would be downside targets short of yesterday’s low at 4212.75.

Yesterday’s sellers broke the October low and breezed right past the 10% correction before reversing course on the “mystery put seller” and closing well above both levels. The significant spike left at the end of the session puts spike rules into play this morning. With the current 70 handle gap down, the most bearish outcome of the spike would be to open below it, which appears unlikely at this writing.

Although we are opening within range, we closed at the highs yesterday on emotional buying. To open this far away from that settlement would imply that there will be some disappointed longs at the open who are suffering from poor location.

Wherever we go from here, we will probably retest yesterday’s low in a few days to shake out any weak hands left in the market. Typically we would rally a bit further first, perhaps to test the 200-day line from underneath. I am betting traders will extend the rally to the WEM high at 4489 before rolling over into a 5th wave down.

Russia / Ukraine is still the wildcard. We will hear from the Fed tomorrow. Perhaps the market will bide its time and do nothing until we hear from them.

A.F. Thornton

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