Markets Await Fed's Rate Decision

As discussed last week, the market has been topping here with a three week test of the high failing two weeks ago.  Then last Friday, we witnessed a THREE DAY test of the high that failed.  The signal was a perfect success as the market opened on Monday down, continuing down throughout the week with a brief bounce on Thursday.  It was a very sellable rally and I added to puts in anticipation of the three month test of the lows, expected this month.

As we can see in the following table, stocks across the globe were decimated.

US markets fared quite well actually as some countries were down up to 7%!

I am expecting further weakness as my monthly count shows the possibility of a three month test of the low at 191.

Even though the prospects appear grim, I still don't see lows below the August/September lows, at least not at this point.

If we view a weekly chart with Bollinger Bands, bands that mark over bought and over sold levels, we can see that oversold levels would occur close to the previous lows.

Looking at the weekly line chart, it appears that volatility might in fact even decline.

With this in mind, I have been selling options at the marked high and low levels to generate income.

While there is lots of room for trading gains within the parameters seen on the previous two charts, my other indicators confirm that volatility, while it may seem extreme based on the current daily moves, is still declining.  This is because the volatility levels caused by the big down move in August/September caused volatility levels to rocket.  Since then, volatility has been muted.

If the next week's moves mirror anything similar to the Aug/Sep moves, then it's possible to see the market drop to the lows in the next couple of days as markets anticipate the Fed's rate hike decision.  Interesting days ahead for sure. 

Markets Mark Time

A good week for short term traders this week as the market broke down sharply on Thursday but then quickly recovered its losses on Friday.

It's unfortunate that the Central Bank manipulation is not even disguised anymore.  All eyes were focused this week on Mario Draghi, the head of the ECB, Europe's Central Bank.  Markets were expecting the ECB to add unprecedented stimulus to the market as Europe's economy continues to flounder.  Minutes before the announcement regarding ECB's intended actions, the Financial Times released a story saying that the ECB would hold rates steady instead of moving them even more negative than they are.  pre-market action saw the markets drop sharply.  When the actual announcement revealed that the FT story was not true, the markets rallied but then during Draghi's press conference, when it appeared that the stimulus would not be as powerful as first thought, markets cracked.  The biggest loser was the Euro Currency.

As can be seen in the chart above, the Euro currency soared against the dollar.  This was the opposite that Draghi wanted to happen.

On Friday, Draghi made further comments reiterating that they would do everything they could to stimulate their economy.  Markets reversed and went crazy on these comments. 

When asked by a reporter if he revised his comments to curb the markets' reactions, he responded, 'of course.'  http://www.zerohedge.com/news/2015-12-06/when-super-mario-becomes-gun-shy-draghi

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My outlook remains unchanged from last week.  Last Friday, we failed to take out the previous weekly high close of 210.04.  That triggered a sell signal for me.  While it's possible that Thursday's sell off could be all that we get on the downside, I still think not.  In fact, the daily action from Tuesday through Friday only provide still yet another three period test sell signal.  Tuesday's closing price (SPY) was 210.68.  Friday closed well below at 209.62 although price did flirt with the 210 level.  I was trying to execute some trades at this point but there was not enough upward conviction at this level to push prices higher or for put sellers to meet my price. 

My week was fortunate as I entered with a range of SPY put positions.  The sharp drop however, resulted in my taking profits when SPY hit 207 and later when it hit 205.  At that point I noticed support at the 10 week moving average and bought some calls.  I was targeting the 208 level and sold the calls there and latter added some more December 31 puts in anticipation of a month-end test of the 191 level.

For the next week or so, I expect little to happen as market attentions turn to the next Central Bank activity which will be the Federal Reserve meeting December 16.  It is widely expected that the Fed will raise rates 1/4% for the first rate increase in ages.  The interest rate markets price in a high probability that the rate increase will occur.  Employment data, also released this past week, also 'appears' strong giving further credence to the rate increase.  

The stock market may think differently though.  We saw the severe reactions when Draghi's comments did not meet expectations.  If the Fed were to start tightening, I can't imagine the market continuing to rally.  In the past, the markets did rally for some time after until a trend in the tightening process emerged.  The bottom line though is that there are too many emerging market economies that would be decimated if rates were to rise and that would surely have a ripple effect throughout the whole world.  When the Fed was expected to raise rates last time, they held off citing foreign market turmoil as an excuse.

My guess is that any reduction of accommodation will signal that the party is over.  There will be a lot of pain ahead.  It's a given.  The only question is when will it occur?  How long can they keep the party going?  Will they try to continue until the next election so that the blame will fall on the new president?  That seems to be how it has worked in recent cycles. 

Market Climb Continues

SPY continued it's upward climb this week despite a much stronger than expected Non Farm Payroll report that showed upwards of 270,000 jobs added to the labor force last month.  SPY closed at 210.04, up 2.11 (1%) on the week. 

Precious Metals collapsed nearly 5% on the news while TLT, a proxy for the long term bond, fell more than 3%.

SPY weekly price continues to ride the four week moving average higher, so it's hard to see a case for any downside correction at the moment. 

Over the past several weeks, we've been watching the weekly line chart and noticed that it was facing resistance at the head and shoulders neckline.  This neckline was breeched this week and now we are at a slightly higher resistance level, the line connecting weekly high closes.  As market patterns generally mirror up and down moves, it's not inconceivable to believe that should price break through this resistance line, it could rally to the 230 level.

At the moment though, I don't see this breakout as likely.

As mentioned previously, volatility, while still at high levels, has reversed and continues to weaken. 

Also, the weekly rate of change moving average chart continues to hold at the 0 line showing that the moving average has stopped advancing.

This shows me that on the weekly data, the market, while continuing to eke out small weekly gains, is losing steam. 

For me, the biggest kicker is the view of the monthly chart.

I always like to look for the three period test pattern.  September's monthly close was at 191.61.  We advanced in October and should we maintain current levels throughout November, it will be a perfect setup for a December test of the 191.61 low.  That would coincide well with a possible Federal Reserve Rate Hike, which is now becoming more widely expected.

My best guess is that a rate hike would be crushing for the markets, even a token hike. 

Currently, I have no positions in the market but will be looking for an opportunity to position myself for next month's potential three month test of the low.