FOMC Rally Is Giving Back All of the Gains – Here’s How I Am Trading Today

December 17, 2021

Posted 9:40 AM ET – In my comments yesterday I told you that a gap reversal off of the all-time high was very possible. The FOMC rally was driven by quadruple witching programs that kicked in after the statement and those gains were given back yesterday. The market will not have a decent bounce today until support is tested.
Key changes in the FOMC statement from previous months:
1. The Fed will be reducing asset purchases (tapering) at twice the rate that was reported at the last meeting.
2. Virus variants could weigh on economic growth and Real GDP growth was lowered .4% to 5.5% for 2021.
3. Median forecast by Fed officials is 3 rate hikes in 2022 and that is up from zero during the September FOMC. Tightening will happen much sooner than previously expected.
4. Median forecast for 2023 is 4 rate hikes and that is higher
5. Core PCE inflation projections are up by .7% to 4.4% in 2021 (their target is 2% and projections have been 2.5% earlier in the year).
Wednesday I told swing traders to sell OTM bullish put spreads before the FOMC. You might have had nice gains on that rally, but now we are back to square one. If you picked stocks with relative strength, they should have weathered the market drop well Thursday and the best candidates will still be above the level where you entered the spreads Wednesday. This is a time to keep your swing trading to a minimum.
Day traders, the best scenario would be a bounce early that does not fill much of the gap. When it runs out of steam it will provide a great entry for shorts. If the market breaches $460.25, be very careful with any buys. That is a key support level and it would be bearish.
Support is at SPY $460.50. Resistance is at $465 and the all time high.
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