Post FOMC Musings

As widely expected the Fed decided to taper by another $10 Billion per month. Worthwhile noting however is that it also delivered on some earlier rumors that it would hint at a more hawkish stance going forward (i.e. interest rate hikes). The response on the equities side thus far has been pretty muted but predictable.  As in draw in all the hobby bears ahead of the announcement just to smack them with a two-by-four post announcement.

Where we wind up closing today is anyone’s guess and to some extent it’s academic and really doesn’t matter. As both Scott and I have been telling you over the past two weeks – entering anywhere inside our current trading range borders on ritual suicide. The chart above shows nothing but the price action of the current month – we’ve got one more session to go. What does this tape tell you? Does anything jump out at you?

Frankly speaking I’m seeing a cigar smoking dragon in a clown suit riding a Harley. Yes, it’s  a complete and utter mess – the only take a way message is that the current trend is either inside a sideways correction or that we are painting a medium or long term top. Given Scott’s posts earlier today and yesterday I would not rule out the latter. Which is why I suggested some cheap insurance – it’s still available but volatility continues to climb. You have been warned.

On the SPX however today’s session was extremely productive as it bestowed us with additional context. See -experienced traders focus on controlling risk while retail chases gains [quote I saw on the ThinkingAlpha feed today]. I really don’t care about the gyrations we’ve been suffering through in the past month. But I care a LOT about price context in combination with various technical evidence.

I’m seeing various momo indicators suggesting a correction is overdue – see above my updated NYA50:NYA200 chart which expresses breadth across the NYSE. It shows as at a possible inflection point but it also does a pretty good job of visualizing the buying exhaustion that may have permeated equity traders. As you can see bullish momentum is oscillating in smaller and smaller signals and over the long term this is unsustainable.

but in the end price will have to follow suit. And for that we need context on the price front. Well, the SPX just produced a technically valid support zone which is rising – and that means the onus now is on the bulls to keep price above 1965 and pushing higher. This may appear of limited meaning to you but for me it carries significant implications.

Quick update on the Dollar campaign I posted about last week. Well, it’s been going pretty well and today’s little pull back was expected. I currently do not see any cause for concern – I’ve been long since 81 and after a three week advance a correction will shake out some of the weak hands. We may even see a retest of the 100-week SMA and I’m leaving my stop in place (< 80.5).

Not surprisingly this has produced a more favorable exchange rate for this lowly expat. I like what I see thus far but the EUR has now approached its 100-week SMA and I expect longs to stage a significant defense down here. Today’s FOMC response has produced a very convenient push higher and some of the strong players who traded this one down may now try their luck flipping for longs here.

Bonds also have responded as well post FOMC – here’s the ZB futures contract which was near its own 100-week SMA just ahead of the announcement. I always get suspicious when I see major symbols approach long term resistance/support ahead of the Fed or ECB. Again shorts now have a good excuse to launch a bit of a squeeze lower but they are facing a weekly NLSL near 136 below. Let’s see how that plays out.

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Cheers,