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