Here Is How I Will Trade the FOMC Reaction Today

December 16, 2021

Posted 9:30 AM ET – The market is going to challenge the all-time high this morning and we are seeing follow through buying after the FOMC statement. The statement was hawkish and I believe the move was largely driven by quadruple witching programs. Once the momentum was established, there was nothing to stand in the way.
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).
Yesterday I advised swing traders to sell out of the money bullish put spreads before the open. This was a nice dip before the FOMC and I suspected the reaction would be bullish. You should have your positions on. Manage your positions and let time premium decay work its magic. I still view this as a low probability trading environment and I still prefer selling OTM bullish put spreads on market dips.
Day traders, I hope you followed my advice yesterday, “After the statement, if we get consecutive stacked green/red candles through the prior day’s high/low and they have little to no overlap, follow that direction. It is important that you have this EXACT pattern for at least 3 bars. If not, keep your trading light and expect volatility. That is the exact pattern we got after the statement.
This morning I would not chase stocks. Gaps up to an all-time high have frequently been faded. I do not feel that Asset Managers are going to be chasing stocks at an all-time high when inflation is high, tightening is on the horizon and when valuations are at 20-year highs. I also feel that most of the move Thursday was program driven (Quad Witching) and those gains can easily be stripped away. Take a deep breath and watch the open. If I see stacked red candles consecutively with little to no overlap on the open, I will short. If I see the opposite it will be a gap and go formation and I will NOT participate. If I see a compression or tiny drift lower that does not fill much of the gap, I will assume we are going higher and I will spend the first 30 minutes finding stocks with relative strength.
Support is at SPY $470.50. Resistance is at $473.50.

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