Ready for a Jump

The excessive put/call ratios from Friday have set the stage for a day of at least 1% gains this week

By Paul Cherney

The FOMC meets on Tuesday. The markets expect a 25 basis point cut, and that's probably what they're going to get.

The markets have already seen six consecutive Fed rate cuts and the major equity indexes are lower now than they were at the start of the easing cycle: on Jan 3, the NASDAQ was 2616.69 and the S&P 500 was 1347.56. If the Fed comes with a surprise 50 basis point cut, that would probably spark a short-covering rally. Short-covering rallies typically last one to four trade days before they run out of momentum. The market is ripe for a short-term jump due to the excessive put volume (relative to call volume) traded in Friday's market.

If there is opening weakness on Tuesday morning, this will probably be viewed as an intraday buying opportunity, but upside appears limited. Typically, the trade day ahead of a Fed announcement is a yawner up until about 30 minutes before the 2:15 pm EDT usual announcement time. The market has anticipated a 25 basis point rate cut for weeks, so there is no reason to think that this is going to be a real headline event unless the Fed manages to use language in the statement which inspires action.

Even though there is downside risk for prints in the NASDAQ 1853-1794 area, a move into this area would probably push the market into an oversold condition, which would compel short-covering and some short-term momentum buying.

The NASDAQ has immediate resistance 1868-1923. Inside this layer of resistance is a focus 1897-1916. The NASDAQ now has downside risk for prints in the next layer of support 1853-1794. Inside this area, there is a concentration of price action (I can't call this a focus because it is too scattered and unorganized) in the 1838-1819 area.

The S&P 500 has downside risk for prints in the 1151-1119 area, within this support band is a focus of support 1143-1128. Immediate support (intraday) is 1170-1165. Immediate resistance is 1174-1186.

Cherney is Market Analyst for Standard & Poor's

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