Expect Nothing And Accept Everything

That will be my motto for this last full trading week of the year as we are at the same time approaching the most significant fork in the financial road of 2015. As I am sure you are all aware this Wednesday at 2:00pm Eastern the Federal Reserve will issue its verdict on whether to make good on a year long promise to finally raise its benchmark interest rate (i.e. fed funds rate). The current consensus is an increase from 25bps to 37.5bps – a meager increase of merely 1/8 of a percent. Nevertheless the increase would be the first since the financial crisis of 2008 and would be perceived as setting the stage for further tightening down the line.

You probably noticed that I italicized the words ‘would be perceived’. Personally I doubt that any real tightening will transpire as financial markets are now clearly addicted to ZIRP and various pertinent stimulus measures. Secondly a massive market correction, meaning a possible revisit to near 2008 wipe out levels, simply won’t be tolerated at least while the Obama administration still occupies the White House. Après moi, le déluge as the saying goes. Let the next sucker deal with this mess, right?

However, even if I wind up being right and any increase would quickly be reverted, we will still have to go through all the motions. That is reality, whether we like it or not, and when it comes to trading it’s usually best to take things one step at a time anyway. So let’s review the current situation in equities and extrapolate the worst case scenarios heading our way.

We definitely need to separate between pre-FOMC and post-FOMC potential. Right now confusion, rumors, and innuendo rule the day. Much of what we’re going to get ahead of Wednesday afternoon has been priced in at this point. What we are seeing on our equities charts right now is simply emotional churn as market makers take advantage of increasing volatility. Which as you can see is expanding and may resolve to the up or downside. The only thing I can promise you this week is that we’re going to see some big swings.

Pre-FOMC:  It’s quite possible that we’re going to touch SPX 1990 ahead of Wednesday as proposed here by our trusted P&F chart. There’s simply not enough technical context on our interval charts (i.e. daily, weekly, or monthly) to suggest a credible support range. So I recommend a hands-off approach here until we get near 1990 and the VIX is tickling the magic 30 mark. Chances for getting whipsawed are simply too numerous. If you’re a swing trader however this is pure manna from heaven – use the Zero indicator religiously as it should provide us with valuable clues in the coming days.

Post-FOMC: Clearly there will be a response to whatever Yellen and her crew decide on Wednesday. If she chickens out once again then I expect a massive squeeze higher and we may even paint the year in the green. However if she’s insane enough to play Crinch and steal everyone’s Christmas then your guess is as good as mine. Again some of the damage has already been priced in but volatility mixed with fear and panic is a powerful cocktail that can drive prices to unimaginable levels. The best I can offer at this point is our P&F projection which points toward 1920 but I would not feel comfortable grabbing long positions until about 1870 and some credible price confirmation, meaning an exhaustion spike lower resulting in a clear spike low and ensuing retest accompanied by tepid selling pressure.

In the interim I’m going on a very sparse diet in the exposure department. Currencies are off the table until Wednesday as I’m already exposed via Scalpius. By the way on Tuesday night I will reduce Scalpius’ exposure to 0.1%. Better to be safe than sorry.

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Cheers,