Daily Plan 12/15

The BIG Day!

Traders-

Tomorrow is the BIG Day! I have been waiting for this for the last week or so. At 1 PM CST FOMC statement, followed by the Powell presser half an hour later. S&P500 Emini (March ‘22 contract) now trading at 4603.

Gonna talk about my thoughts and expectations from the event before diving deeper into my plan and levels.

However before any of that, let me recap the session today.

I had the following 2 scenarios for the day. A bearish scenario if we opened below 4667 and a bullish scenario if we opened above 4675.

We opened at 4626, scenario 1 was in play. I sent this tweet a few minutes before the OPEN. The high of the session today was a few points above my 4646 order flow level before selling off about 55 handles, sharply lower. Primary thesis, per scenario 1 , was to sell the rips and pretty much all of the session, there were 3-4 opportunities to sell the rips.

Scenario 1 reiterated at 4645 before a 50 point dump.

A) Few thoughts before the FOMC:

1. Technically, TRIN has stayed way below 1 today, at one point reading as low as 0.6. This indicates money flowing into some stocks for sure. Now they were not the mega caps as evident by the beating they took today.

2. The theme of the last few weeks has been to sell the small caps and buy into mega caps as the market deems these stocks a safer bet for inflationary times. One way to read the action today may be that the market expects the FED to be less hawkish or does not consider inflation to be an ongoing phenomenon.

3. S&P500 is now quite oversold at these levels (but needs to be validated with something.. read on for more)

Next section is my personal thoughts on what I think Powell will do. You can skip over this and read section C for emini levels for those in a hurry!

Mega cap sell may indicate rotation

B) My personal take on FOMC:

1. IMO it will be hard for Powell to be outright dovish, given his very recent hawkish statements.

2. Consensus expectation is that the FED will increase the rate of taper and finish the taper by March. Which sets them on path for first rate hike in June ‘22. This is the expected outcome and currently priced in.

3. Now Powell’s dilemma is 2 fold: fight inflation AND keep liquidity flowing in the bond market.

4. The bond market is already showing signs of lack of demand and liquidity issues. If FED increases the rate of taper, then this demand goes down more, and liquidity issues worsen.

5. If inflation indeed turns out to be transitory, screwing the bond market is an unnecessary risk Powel assumes at this stage.

6. So Powell will MOST likely either stick to the rate of planned taper or increase it only by 7.5 Billion dollars. This means taper ends in June and rates may hike in September. Both of these will be positive scenarios for the market.

7. The most hawkish scenario will be if Powell decides to wrap up the taper before March. This may lead to a large sell off in assets like stocks, gold etc

8. Additional clues may be hidden deep in verbiage vis-à-vis his language about Omicron and its impact on unemployment rates. If he uses language around how he is concerned about Omicron and its impact, I will consider that as dovish messaging. If he uses language to the effect of how FED has now retired the phrase “transitory inflation” and how things are looking great for economy, or if he said FED is “data dependent” and first rate hikes may come sooner than expected in June, I would consider that as a very hawkish messaging.

9. To confirm this with market action, I need to see S&P500 run up to 4630-4640, take it out on strong volume and bid up 4660 shortly thereafter. This will be my confirmation that the other participants also consider the FOMC to be dovish (or less hawkish). If we remain below 4630-4640, or worst start doing offers below 4600, this may be a confirmation of a more hawkish FED IMO.

C) So having said this, these are my 2 main price scenarios for tomorrow:

1. A market that trades above 4630/4640 post FOMC may be a bullish market for me, and I will consider buying the dips with my LIS right below 4630. Targets 4660, followed by 4676.

2. A market that sells off below 4600 and stays there will be a bearish market for me with targets at 4530-4540.

3. I will be neutral between 4600-4630 and for most part stay out of low liquidity conditions between now and the FOMC.

4. S&P500 Emini (March ‘22 contract) now trading at 4603.

Any updates to this plan, if applicable, will be hosted on my Twitter and/or Telegram.

D) What else?

If the market gets legs after perceived dovishness in Powell, two stocks I like are CVX and XOM.

The energy sector has been brutalized and I think the sector itself may be quite oversold. CVX at 115 and XOM at 61 bucks could be decent levels with about 2-3 % risk. Again, the broader market needs to find its footing if these stocks were to rise IMO. 

Be back with more later. Subscribe now to get alerted to similar posts by me up to 5 times week.

~ Tic

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