We saw one the most highly anticipated Fed meetings this year as the markets trended sideways leading into the result. Some of the bulls were hopeful in receiving QE2 while the majority predicted nothing would change from the August meeting. Sure enough, nothing did change. The Fed still implied it will use QE2 to hold the markets up, if necessary. However, it is not necessary at this point in time and the recent rally has priced in this news.
Usually when news is predicted, nothing significant happens. It is the news which is not predicted that makes the most impact. With Fed meetings, it has become a trend that the first direction the markets move usually finds a reversal soon thereafter. After the Fed announcement was finished, the markets trended higher only to see a final hour strong-volume sell-off that saw only the Dow Jones still finishing green.
August 10th (circled on chart) was the last Fed meeting and at that point in time, we were near the trading highs of the year. After the Fed meeting, the market saw a sell-off the next day and downtrended towards the lows of the year. Will we see a similar setup? It seems too easy to predict which always makes me leery but, the markets are desperate for a pullback to entice more bulls to jump in.
The On Balance Volume (OBV) is starting to build a bearish divergence and the high volume selling in the final hour was concerning. With the markets clearly overbought, this could be the bears finally standing their ground as we don’t have another Fed meeting until November. While a low-volume pullback would be healthy for the charts, we don’t seem to have many healthy pullbacks this year. Instead, we find ourselves going from uptrending to downtrending back to uptrending rather quickly. I have a healthy short position hedged against my longs for this reason and am glad to hear Doug Kass has built his short position as well. Doug Kass has been the most accurate analyst I’ve seen this year so, I tend to keep an eye out when he changes between long and short the market.
If the bears can break the support levels around 1130 in the S&P 500, we can expect that to trigger stop-losses and give the bears some confidence. Now that the bears don’t have to worry about QE2 right now, they may have more energy in fighting the bulls. If the bears can break 1130, I’ll look to press my shorts in ProShares UltraShort S&P 500 (SDS) and ProShares UltraPro Short S&P 500 (SPXU) and quickly book profits in my longs. Since I made the successful Orexigen Therapeutics (OREX) FDA trade my largest position (and sold per my exit strategy) last week, I have higher short exposure than longs at the moment. Without a healthy pullback, it is increasingly harder chasing longs in this rally when you have discipline.
As always, do your own homework to see if you agree. Have a good night and I’ll see you in the morning. Good luck out there.
Mike
At the time of publication, Kudrna was Long SDS and SPXU but positions may change at any time.
