The market is waiting for the FOMC Statement Wednesday

PRE-OPEN MARKET COMMENTS TUESDAY – There’s only one pattern I am interested in trading. I need a nice dip today and/or tomorrow that takes the SPY down to at least $602 and $600 would be even better. If I get that, I would take a small short-term swing that spans into next week.

Longer-term swing traders should be in cash. Can the market go higher? Yes. Best case scenario it reaches $617 by year end. Can the market go lower? Yes. The first major support level is around $580. That leaves me with roughly $12 of upside and $25 of downside. I view the upside scenario as being more likely (66%) than the downside scenario (33%). In essence, I have equal risk/reward if I am long here and I don’t trade those odds.

I base my upside estimates on a long-term H+ trendline, a measured move and the price action that got us to this level. I have also factored in seasonal strength. I base my downside estimate on the average dip in the last six months and that coincides with horizontal support. The last leg of this rally has come on extremely light volume and those moves can easily be stripped away. I am also watching the disconnect between a dovish Fed and steadily rising yields.

The price action the remainder of the year is going to be choppy and the volume will be light. In general, there is a lot of optimism that Trump’s policies will be great for business (lower regulations and lower tax rates). However, an austerity program will take a bite out of economic growth on a short-term basis. Those workers will have to find other employment and that takes time. On a longer-term basis, cutting government waste will be a positive. The national debt will continue to spiral out of control for structural reasons (interest expense, Social Security and Medicare) so reducing expenses will be important to our credit rating and the strength of the dollar. Tariffs could have an spark inflation and there could be retaliation by our trading partners. I’m not weighing in on this being good or bad, just that it sparks uncertainty and the market doesn’t like that. If the tariffs are used to motivate policy changes by other countries (border control, retailiation for tariffs placed on US goods), they could be effective in that respect and temporary. If they are used unilatteraly and on a longer-term basis to make US products price competitive with foreign products domestically, it will “shock the system”. Again, I am not saying that tarrifs will be good or bad for the US, just that they will lead to uncertainty and market volatility. Republicans control all three branches so they will be able to quickly pass policies. In his last term Trump had to fight the Democrats and his own party. He is more motivated than ever to get things done and the tide from four years ago has shifted in that respect.

All of this will play out next year so let’s focus on the next two weeks.

If I get a dip to $602 or $600, my risk/reward improves slightly for longs and I would buy and hold into year end – small. The odds improve because I am entering at a lower price (less downside and more upside), but there’s another aspect to the trade. That drop is going to attract some short sellers. When they cover, they will fuel the rally. Asset Managers are not going to chase new highs, but they will buy dips. They are not active at this level, but they might be interested at $600. There’s also triple witching this Friday and it has generally had a positive influence in the last year. Institutions could “goose” the move as they roll positions.

If I don’t get this drop before the Fed, I won’t do anything. It is going to be hard to day trade. Keep it small.

Heading into next year my worst case scenario would be lift off. I will be in cash and I won’t want to chase. My best case scenario is a drop. I need to evaluate the depth and duration of it. That will tell me how aggressive sellers are and how aggressive buyers are. I need that information.

Support is at $602 and resistance is at the all-time high.