Waiting on the Fed

Here's how the markets tend to play out on FOMC meeting days

By Paul Cherney

End-of-day price momentum models based on both the Nasdaq and the S&P 500 have lost their positive biases; they are technically neutral.

In Wednesday's session, near 2:15 p.m. ET, the Fed will announce its decision on interest rates. There is an intraday trading pattern which has occurred quite often since the beginning of 2001 and that is described below the following commentary.

I took the time to look at price action for the S&P 500 on the day of a Fed rate announcement (regardless of whether they moved rates or not) all the way back to January, 2001. Of the 17 scheduled meetings, on 12 out of those 17 occasions, the S&P 500 closed in one direction (higher or lower) on the day of the announcement and then closed in the opposite direction on the following trade day. If the S&P 500 was up on the day of the FOMC announcement, it closed lower the next day and vice versa. Twelve out of 17 is 70.5% the time, so that puts the odds at about 7 in 10 that whatever direction prices close on Wednesday, they will close in the opposite direction on Thursday.

Usually, on FOMC announcement days, price action is a dull bore sideways until near 2:00 p.m. ET, when some price movement can start.

Intraday Price Pattern Common Over The Past Couple Of Years: For FOMC announcements of monetary policy, an intraday pattern which has been popular over the past couple of years is that the initial knee-jerk reaction in prices after the announcement proves to be the direction for the rest of the session, but the first move usually reverses and prices run the other way for a while before they reverse again and finish in an intraday trend in the direction of the first knee-jerk reaction.

I don't know whether this will happen Wednesday, but when you think about headline positions (ultra short-term leveraged bets on the direction of the first price reaction to the headline), there is at least one rational explanation: The first knee-jerk price movement puts either the bulls or the bears into the money, and prices can get a boost in the direction of the initial move by wrong-way bettors closing out wrong-way bets. Once momentum in the opening direction appears to be weakening, the correct-way bettors start booking their profits and prices can reverse again.

Here's an example: Suppose the first reaction is a bullish spike higher. Bulls who are ultra-short-term long are "in the money" and bears are frantically trying to limit losses by buying to cover their shorts, this buying demand pushes prices further in the same direction as the initial knee-jerk (very rapidly), but once the move appears to have run out of intraday momentum, the bulls want to book their profits, so they start to sell, which reverses prices again. As prices reverse back down, the stubborn bears who froze as prices rose start to see that their positions are not losing as much money as they were at the top, their positions could even go into the money, regardless, movement back down will entice more and more of them to close out their open short positions by buying and that might reverse the markets back in the direction of the initial knee-jerk response to the headline. This can happen no matter what the direction of the initial knee-jerk reaction is.

Resistance: The S&P 500's immediate intraday resistance is 984-995 and 993-1003, which makes the 993-995 an especially thick area of resistance. Next resistance is 1010-1015.12. The bigger picture of resistance, which was established by price action in June, 2002, is that the S&P 500 has a band of resistance at 1008-1041 with a focus of 1020-1031.

The Nasdaq has immediate intraday resistance at 1610-1620, 1641-1660.47, and 1658-1669, which makes the 1658-1660.47 area especially strong resistance.

Support: The Nasdaq has support at 1603-1584.

Immediate intraday support for the S&P 500 is 995-984, then overlapping at 989-972.

Cherney is chief market analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.