Waiting on the Fed

It would probably take an almost drastic statement in the Fed's announcement to surprise the markets

By Paul Cherney

The Fed's decision on interest rates is due near 2:15 p.m. ET on Wednesday. They are expected to raise the federal funds target by 25 basis points, and if they make a bigger move, that would be a surprise to the markets.

The technical case for the NASDAQ and the S&P 500 remains the same, neutral but still with a positive bias.

Lingering in the background: On Friday, June 25, the NASDAQ had a close above 2023.54 and this has potentially short-term bullish overtones. The recent trading range has been 2023.54-1963, or 60 points, so the potential upside target would be 2083.

On Wednesday, June 23, the S&P 500 closed above the 1142.18 level. This represents a bullish breakout of the recent trading range and should be treated as such unless proven otherwise. The standard calculation for a potential price target is to take the trading range (1142-1122) and add it to the breakout point which would create a potential target of 1162 for the S&P 500.

Intraday rises that were turned back have established another set of important price levels for both the NASDAQ and the S&P 500. NASDAQ 2039.93 and S&P 500 1146.34 are the price levels, and if these levels are exceeded, pressure will be on shorts to cover. Any rise that cannot produce a NASDAQ close above 2039.93 and/or the S&P 500 close above 1146.34 would increase the chances for some slow motion sideways trade in the upper half of the recent trade ranges.

The VXO's (the CBOE volatility index, or VXO, measures implied volatility in OEX options contracts) 10-day exponential moving average was 14.95 near the close on Tuesday. Stock prices often move lower when the VXO moves above it's 10-day exponential moving average and puts distance between itself and the 10-day. So, a lift in stock prices is probably going to have to force the VXO back below 14.95. If not, this would raise suspicions about the ability of the advance to sustain itself. A chart read on the VXO suggests that prints below 15.38 would be an intraday positive for equity prices.

The NASDAQ's immediate resistance is 2033.40-2039.93. Older resistance is a band 2037-2079, inside this resistance is thick price action 2048-2064.

The NASDAQ has support 2023-2013.73, then 2006-1960 with a focus 2002-1985. If the NASDAQ were to weaken and undercut the 2013.73 level, that would increase the odds for a test of the next layer of NASDAQ support that is broadly 2006-1960 with a focus of support is 2002-1985.

The S&P 500 has immediate intraday resistance 1141-1146.34. Additional resistance is 1149-1176.97 with especially thick resistance 1149-1158.98. The March 2002 shows well-defined layer of resistance 1166.27-1173.94.

The S&P 500 has support 1137-1134. Next support is 1129-1113.

Downside should be limited and higher prices should unfold, but if there is one day of an inability to gain ground and close with gains on the day, then expectations would grow that the markets see sideways price action and drift lower.

There is a regular intraday price pattern which has played out more often than not (since the beginning of 2001) in the wake of the Fed's 2:15 p.m. announcement after its meeting. Prices for the S&P 500 spike in one direction at the announcement, then there is a reversal and lower prices follow, but ultimately, prices re-assume the direction of the initial spike in reaction to the announcement.

There was a notable exception to this pattern. It occurred in January of this year. The Fed had a two-day meeting which ended on Jan. 28, and it was in this statement that the Fed removed the phrase "considerable period" and included can remain "patient." After that Fed announcement, prices moved lower in their initial reaction and then basically moved lower for the rest of the session with only a small rebound from intraday lows during the last 20 minutes.

The Fed has already made it perfectly clear that there will be a rate hike on Wednesday, and I interpret the phrase "measured" to mean only 25 basis points. It would probably take an almost drastic statement in the 2:15 announcement to surprise the markets. The markets expect a 25 basis-point hike. What the markets expect usually does not hurt them when it comes to the Fed.

Cherney is chief market analyst for Standard & Poor's

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