Waiting for the Fed

Here's how price action could unfold Tuesday before and after the FOMC announcement

By Paul Cherney

The technical condition of the markets is neutral.

Even though the S&P 500 has gone sideways for the past few sessions, there is still downside risk for S&P 500 prints under 950, maybe a retracement to the 930-910 area. These markets have not seen a one-third or a 50% retracement for the move up since March's lows, and retracements like that are common, but in the short-term, prices have stabilized.

It would take a Nasdaq close above 1675 and or an S&P 500 above 985.75 to raise doubts about concerns for an S&P 500 test and possibly a close in the 948-912 area of support.

On Tuesday, the FOMC meets. Over the past couple of years a repeated pattern has been very common on an intraday basis: The initial knee-jerk reaction in prices after the announcement proves to be the direction that prices ultimately pursue, but that 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 on Tuesday, but it did happen at the last announcement.

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 that same direction 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.

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 could happen in either direction.

Resistance: The Nasdaq has immediate intraday resistance at 1666-1675.46; an intraday move above 1675.46 should generate follow-through for a test of the next layer of resistance, which is 1687-1723 with a focus at 1695-1703. The Nasdaq has major resistance at 1722-1758. Inside this layer of resistance is a focus of resistance at 1737-1753. I think it would take a headline universally recognized as bullish to move prices up to the 1690 or higher area.

Immediate resistance for the S&P 500 is 984-991. The S&P 500 has brick-wall resistance at 988-1015.41. Its focuses of resistance are 993-1000, 1005-1008, and 1010-1015. 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 at 1020-1031. If you look at the overlap of resistances, the 1008-1015 layer is the immediate stumbling block for S&P 500 prices.

Supports: The S&P 500 has support at 976-960.84. I cannot rule out that sometime before the middle of September that 949-912 support will be tested, but for right now, prices have stabilized.

The Nasdaq has a focus of immediate supports at 1652-1640 and 1643-1623; this is within the broader 1648-1597 layer of support.

Cherney is chief market analyst for Standard & Poor's

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