This Is How I Will Trade the FOMC Statement Today
Posted by Pete Stolcers on March 20
PRE-OPEN MARKET COMMENTS FED-DAY -Yesterday the market jumped to a new relative high and the breakout at SPY $281 was gaining traction. Comments from trade officials sparked volatility later in the day and profit-taking pushed stocks to their lower the day. The headwinds are blowing and gains from this point forward will be hard-fought.
US/China trade negotiations continue, but the summit has been postponed until June. It’s no coincidence that the tone with North Korea has soured (they are threatening to resume rocket tests). China will use this as leverage during the trade negotiations. They scripted the last summit with Kim Jong-un and they will keep him in line if they get what the trade deal they want. These stalks will continue for many months and Xi does not want to give Trump any victories. He will drag this out into 2020 if he can (even if it means hurting his own economic growth).
Theresa May asked the EU for a three-month extension. She is likely to get it, but rumor has it that this is the last one the EU will grant. The EU is suffering while this agreement is in limbo.
BMW said that profits will be much worse than they were a year ago. FedEx cited slowing global conditions and they lowered guidance for the second time. Taiwan’s exports were down 10.9% (-5.6% expected) and machine tool orders in Japan were down 29.3% in February. The Japanese government downgraded its assessment of the economy for the first time in three years. Global economic conditions are deteriorating and the undertow is strong. For some reason investors feel that a trade deal with China will reverse this trend and it won’t.
All eyes are on the FOMC statement. Fed officials have been very vocal and I’m not expecting any surprises. Traders will be disappointed when the statement doesn’t spark much of a reaction.
As long as global weakness does not spread to the US investors won’t worry. The first sign of trouble (soft economic data or earnings warnings) will spark profit-taking. FedEx is considered a global barometer for economic growth. It is a red flag as far as I’m concerned.
Swing traders should remain in cash. If the SPY trades below $281 at any time take a short position and use SPY $283 as a stop on a closing basis. The “fluff” from last week’s quadruple witching rally is likely to reverse. I’m not looking for a full-blown decline at this point, but the price action is “toppy”. The downside risks are greater than the upside rewards.
Day traders should look for follow-through selling this morning. The reversal yesterday will weaken the bid and the market will not move higher until the downside is tested. Watch support at SPY $281 and use that as your guide. If the market easily breaches that level and it makes a new low after two hours of trading, favor the short side. I’m not expecting any big fireworks ahead of the FOMC statement. If the reaction is negative and the market is below $281 support I will trade from the short side. Let the dust settle for 15 minutes after the statement. A dovish statement is expected and I believe any surprise favors the downside. Most Fed officials expect to hike one more time this year and the market is not pricing in any rate hikes.
I have outlined a bearish scenario, but the most likely outcome is a muted reaction. The price action will compress after two hours of trading and we will be “dead till the Fed”. Let the reaction settle for 15 minutes and follow the momentum.
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