A Fat, Happy Fed, and Sell Signal

Good Morning:

• This a quick reminder that I will be in the Trading Room today calling out plays to teach how the market algos are reacting to price and how we can follow them, or at least stay out of their way. I will join the room at 10:00 am EST after the Conference Board reports Consumer Confidence for December. I don’t want an open trade during the announcement.
• I am not expecting a lot of activity in the room today as the market will likely quiet down into the Fed announcement tomorrow. It should be a good day for teaching and learning.
• The Navigator Swing Strategy sell signal painted as anticipated yesterday. The sell signal formally triggered at 4056 on the S&P 500 futures index.
• But it is not surprising to see some profit-taking before tomorrow’s Fed rate increase and statements. A selloff of a couple of days is always in the cards and tolerable. What triggered the sell signal is the recognition of various cycles in their topping zone, with the possibility of an intermediate decline ahead lasting several weeks. Also, fear indicators have moved into the bullish zone, which is bearish.
• The pre-market (S&P 500) would have gapped down again this morning with another True Gap. I would have advised to tee up Gap Rules, but the market had a positive reaction thus far to employment costs reported slightly lower than expectations. So monitor for whether the gap manifests and apply the rules if necessary.
• Support today is at 4010, then 3950. The 3950 level is extremely important as it marks the 200-day line and the highest volume node in the entire correction from the January 2022 peak. It is a high “energy” center and, therefore, a magnet. Resistance lies at 4110 and 4133.
• If I were the Fed, I would be fat and happy. In case you haven’t noticed, the stock market has been rising since October, even though the Fed raised interest rates and continued to talk tough. So what has been the harm in normalizing rates?
• The Fed also knows that the stock market could rocket to new highs if they transition to an accommodative or neutral stance. That likely is the last thing the Fed wants at this point. Accordingly, I expect the Fed to continue to “Curb our Enthusiasm” in tomorrow’s statement and press conference.
• Still, the Fed Funds rate and their target rate are converging – in other words, “real” interest rates are finally shifting to positive. So a lot of the Fed’s work is done for now. They don’t need to move much beyond 5%, which can be accomplished in the next few meetings. In my view, the Fed and the Market are in sync.
• The point is, no matter what you hear about the economic world coming to an end and absent a catalyst, don’t get overly bearish. What should happen now is a test of 3950 on the SPX cash index or about 395 on the SPY. How the market reacts at these levels will give us valuable information about our next move.