The Federal Reserve will announce its interest rate policy – if any – this week while the market is going through the quarterly convulsion know as triple witching hour. It should be a fun week.
Triple witching is the week when futures contracts based on the S&P500, the Dow and the NASDAQ indices near their expiration dates and traders ‘roll over’ to trade the next contract, in this case the March 2017 contract. Options on the futures contracts are also expiring, and so are options on individual stocks.
Usually this disrupts the even unfolding of the universe, because there is usually a difference between the contract being traded now and the contract that will be traded after the ‘rollover’. For the S&P500 futures, for example, the next contract (ESH7) is trading about five points below the current contract. Correcting that imbalance will kick the price up and down until it settles.
Now add the coming Fed rate increase into the mix. The market is saying there is a 93% chance the Fed will increase interest rates on Wednesday, and most traders are acting as if it is a done deal. It may not be, but if the Fed finally does what it has been talking about for a year, the effect on the market is still unknown.
Normally an interest rate increase pushes stock prices down, but this one has been telegraphed so thoroughly there will be little shock impact.
Instead the emphasis will be on the language in the Fed statement and in Fed Chair Janet Yellen’ press conference. The real kicker is not this rate increase, if it occurs. It is the two more increases the Fed has hinted will come in 2017.
We are in the middle of a red-hot rally in US equities. Traders are speculating that this is the last big burst to the upside before the bottom drops out.
A few harsh words from the Fed, supporting the prospect of more rate hikes in 2017, regardless of what they do on Wednesday, maybe enough to scare the big money back onto the sidelines.
Markets nowadays are all about perceptions. If the Street is persuaded the Fed means to stop the party, the party may stop… regardless of what the Fed does.
Last week
The S&P 500 cash index ($SPX) closed at 2259.53 last Friday, up 67.58 points for 3.08 % net weekly gain. The SPX broke its November’s high on Wednesday and kept rallying into Friday for a higher closing and a new all-time record high. The long-term bull market continues.
The price action was well supported by a broad rally in blue chip stocks. It looks like any money that was sitting on the sidelines came rushing back in.
This week
This week the November high – which is now the broken resistance line at 2213.23 – will be a major support. Holding above it would maintain the short-term uptrend.
Right now a rising wedge pattern is forming in the uptrend which suggests the index may pull back briefly. The bottom of the uptrend channel could be retested, but is likely to be held up this week.
Today
For the S&P500 mini futures (ES)
ES had its fifth day rally and closed at the highest level in history. The price action was bullish. But the volume was lighter than average, which could be due to the contract rollover.
Today 2255.50-56.50 will be a key zone. A failure to move above it could lead ES to repeat Friday’s range move first before it takes the next price direction move.
The Daily PMO indicator resumes its rally, approaching overbought territory, while the slow STO indicator remains overbought, but not extremely so.
Both indicate that while the ES has an ultra-short-term overbought condition and a minor pullback is likely, it will not harm the uptrend.
The low of the uptrend channel and November’s high at 2213.75-11.75 will be the major support for today. Buy on the dip will be a common strategy.
Major support levels: 2193.50-95.50, 2183-81, 2172-74, 2165-62.50
Major resistance levels: 2268-72.50, 2279-83.50, 2288.50-93.50, 2300.50-05.50
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