Posted 9:30 AM ET – Yesterday the Fed raised rates by 25 basis points and that was expected. There was a slight chance that the Fed would hike by 50 basis points and the market rallied when that did not happen. The macro back drop has not changed much this week.
The Fed is hawkish and it sees 25 basis point rate hikes at each of the meetings the rest of the year (1.75%) and 3 rate hikes next year. The first rate hike will not have much of an economic impact because interest rates are still near historic lows. Each subsequent rate hike will have a more meaningful impact and Asset Managers will still remain cautious for the next few months. The Fed lowered its GDP forecast to 2.8% for the year (from 4%) and they raised their expectations for inflation.
China’s “lip service” provided a nice short covering bounce. They promised to ease up on tech regulations and to consider more accounting transparency to avoid delisting. They also said they will support financial markets (property developers). As I eluded, there is no substance to these claims. I view the bounce as just that and these stocks will soon run out of steam. Set downside alerts. These will be good shorts when this bounce runs out of steam.
Swing traders should remain in cash. I believe our market bounce is temporary. There is not one Asset Manager that believes that this will be the last chance they have to buy stocks at this level. The SPY has spent a month below the 200-day MA and that is a sign of selling pressure. Aggressive swing traders can consider selling bearish call spreads on weak stocks as long as the SPY stays below the downward sloping D1 trend line. The 200-day MA is just above it and it will also provide resistance. Don’t go overboard. The weekly chart of the SPY is still very bullish and we want to tread cautiously. These should be neutral to slightly bearish trades and you should be selling the call spreads above technical resistance. If that resistance is breached you need to stop the trade out.
Day traders should expect the downside to be tested early. The gains after the announcement will be challenged. 1OP will start off on a bearish cross. If the price action is choppy and weak during the first 30 minutes, support will form and we could have a nice bounce to trade. After a big rally yesterday, buyers will try to flex their muscles and see if the downward sloping trend line can be broken. This is quadruple witching so I am expecting decent two-sided action. Use 1OP as your guide.
Support is at $425 and resistance is at $436.
HAPPY ST. PATRICK’S DAY!