The Federal Reserve chickened out of an interest rate hike on Thursday, and the immediate-term market reaction went something like this:
In short, it was a fairly vanilla reaction to a dovish Fed. The question is, can we read something into these initial price reactions, and if yes, are there potential trades setting up for the active investor to take advantage of?
From a trading perspective, I wouldn’t jump to too many conclusions just yet as much of today’s reaction will be fogged over with the quadruple-witching options expiration, which will linger into Monday with its hangover effect. In other words equity traders may need to wait until Monday afternoon to get a truer read on the reaction to Thursday’s FOMC interest rate decision.
Nonetheless, on the below charts I walk you through the here and now, as well as possible setups — at least to the extent we can see through the fog for the near-term.
Starting off with stocks, the S&P 500 in its initial reaction to the no-hike announcement rallied into the resistance zone between 2,000 and 2,040 (blue box) then promptly turned south, leaving behind a bearish reversal candle on the daily chart.
Considering this area of resistance also matches up with the 50%-61.78% Fibonacci retracement of the entire selloff from the July top down to the August lows, this is likely a decent spot for active investors to leg back into short positions in the index for the first time since late August. This can be accomplished either by selling short something like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) or buying puts on the ETF, which have cheapened substantially in recent weeks as implied volatility came down.
Tactically, first downside targets on the SPX Index now are 1,920 followed by 1,880.
The benchmark 10-year U.S. Treasury saw its yield fall to 2.22% on Thursday as bond prices rallied on the back of the “lower for longer” feel from Janet Yellen’s press conference.
The trade here is much more difficult to pick out in my opinion, as it is in the center of the dovish/hawkish debate. With the Fed on the cusp of raising interest rates for the first time in nine years, I suspect yields on the longer end of the curve as represented by the ProShares UltraShort 20+ Year Treasury (NYSESARCA:TBT) could remain somewhat range-bound.
Nonetheless, from a price action perspective, we see that the TBT ETF is now battling with its 100-day simple moving average (blue) and horizontal resistance. Should this area around the $47 level be overcome, then a trade back into the low $50s may set up.
I might add that the financial sector underperformed on Thursday as the yield curve flattened. We all know that the broader market can’t advance very long without at least some participation of the financial sector, which speaks to my trade idea from above on the S&P 500.
Namely, that the index is capped on the upside and likely needs to retest lower before a better year-end rally can unfold.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.