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FOMC Statement Today
www.oneoption.com
I am expecting “dovish” Fed comments, but that doesn’t mean the market will rally.
PRE-OPEN MARKET COMMENTS FED-DAY – The market drop the last month is over-extended, but that does not mean that it can’t go lower. I have been watching for signs of buying the last two days and I haven’t seen it. After such a big drop shorts would be nervous that the Fed is going to hint at a rate cut in May or perhaps nail down the June timeline. That should have sparked a market bounce ahead of the FOMC Statement this week as they take gains. Yesterday the market dropped back down to test support and it never got off of the deck.
What does that mean? It could mean that shorts are not worried about the Fed’s statement or it could mean that any buying has been met by long-term sellers who are reducing risk. The long-term sellers more than offset short-term buying. If the market had bounced, it would be a sign that sellers were not that aggressive at this level and that the statement could produce a nice bounce. Now I feel that is much less likely. This price action has confirmed my bearish longer-term outlook.
What if the Fed cut rates today? That is widely unexpected and it would be a shock. The initial reaction might be bullish, but it won’t last long. The focus will immediately shift to fear. What does that Fed know that we don’t know? Are economic conditions really that dire?
We know that the Fed expects Q1 GDP to contract (-2.5%). That could spook a lot of investors.
How should I trade this event? If I had seen some signs of buying this week I would have bought a handful of bullish call spreads on bank stocks. I didn’t see that so I am getting cold feet and I am opting to exit that position and to be in cash. This offers me the greatest flexibility.
What do I want to happen? Given my bearish longer-term outlook, I want a wimpy bounce that lasts a week or two and that falls short of the 200-day MA. That would set up a great entry point for day trading and swing trading shorts.
What do I NOT want to happen? I would prefer not to see another leg lower. That would force me into action and I would still be focused on short term trading because the odds of a bounce are high. I would be chasing, but at least I would not be taking losses on bullish trades.
I suspect that this is a deeply oversold condition and the Fed’s comments will be dovish. That should produce a bounce, but I am less confident in that happening than I was a few days ago. Trading is about gathering information and adjusting your game plan. This is where I’m at right now.
Support is the low from Tuesday and I believe it will hold. Resistance it the high from Tuesday ($565).
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