Yesterday’s Fedstravaganza went off as expected, with all the key algo-stoking language left in and no hints of tightening anytime soon. Key points from our Dec 16 post:
When I start nailing downside and intra-day targets as I have the past two weeks, it’s probably time to expect a massive rally that defies traditional patterns and technical analysis.
First, it simply can’t be done without the USDJPY’s cooperation… a bounce back above the H&S neckline and .236 would go a long way to erasing stocks’ losses. And, a move back above the white .618 at 120.11 would essentially guarantee new highs.
Second, rates need to rise. I know this is somewhat counterintuitive, but stocks have been positively correlated with 10-yr note rates for most of the past year. At no time was this more obvious than in mid-October, when the plunge in SPX (thin purple line below) mirrored the plunge in rates.
Sure, in the longer run, higher rates will undermine corporate profits and the nation’s economy — both of which have counted on ZIRP to balance their books. But, that’s something to worry about tomorrow, not today.
The somewhat tricky part here is that if the Fed simply raises short term rates, stocks will plummet. So, they’ll work to steepen the yield curve as they’ve done many times in the past. Bottom line, the Fed will need to do its part — starting with tomorrow’s statements which I expect will strongly boost stock prices.
Sure enough, USDJPY did it’s part, scurrying back (well) above the H&S neckline.
And the bond market behaved as expected. Short rates remained steady or even dropped a bit, while rates on the long end of the curved ended up higher. The 10-yr, having bottomed out at our 2.05 target the day before, jumped up to 2.15 and is approaching our first upside target.
The part we didn’t see coming? The timing of the Swiss central bankers NIRP announcement this morning. The futures are saying 20+ points, so I’d say our .618 Fib target is looking pretty good. From Tuesday:
As for key levels, look for resistance at the SMA10 (2040, also the purple .618) and SMA20 (2050.)
UPDATE: 10:00 AM
SPX barely paused at the .618 (and, didn’t pause at the SMA10). So, we’ll look for a reversal at the SMA20 (currently 2046.84) and count the .618 and SMA10 as support for the first pullback.
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