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Yellen & Fed Clash to Spark More Volatility
Gap-up after closing near the LOD is not attractive
Danny Riley
March 23, 2023
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Our View
Like it or not, a 25 basis point increase was the smart move. As we noted yesterday, virtually any other action would have created major doubts among market participants. Additionally, I don’t think the 25 bps increase is what sparked the late-day selloff — that part was largely priced in by the market.
Instead, comments from Treasury Secretary Janet Yellen were firing off around the same time Fed Chairman Powell was speaking yesterday afternoon. (Sidenote: couldn’t they have coordinated that a little bit better?)
In any regard, Yellen’s comments combined with the Fed volatility ultimately sparked the late-day selling pressure. The Fed stuck to its guns, essentially echoing its “higher for longer” rhetoric. The Fed sees rates at ~5.1% at year-end and ~4.3% by year-end 2024. Both are meaningfully higher than the market’s current expectations of 4.25% to 4.5% and 3.0% to 3.25%, respectively.
However, rate projections can change and investors know that. Instead, it was Yellen saying that the government “is not considering insuring all uninsured bank deposits” that seemed to rattle investors more.
In short, the market is more worried about ongoing bank failures than interest rates right now — and it’s not hard to understand why.
Our Lean
Remember yesterday’s note from our friends at the Stock Trader’s Almanac: “The S&P 500 has been up 5 of the last 8 Fed rate hike announcement days, with an average gain of 0.69%. It’s been down 5 of the last 8 on the day after, with the average S&P 500 loss of -0.91%.”
So it’s not out of the ordinary for the S&P 500 to continue its volatility from Wednesday afternoon.
The S&P initially pushed higher into 10:30 but stalled out ahead of the Fed— no surprise there — then it took out the session high and low over the next half hour. That volatility is what makes the Fed days so hard and it could continue.
Our Lean: As for today, I would have preferred to see a lower open and then traded around yesterday’s low. A reclaim of that low would let us get long, while rejection at that low would create a pivot to trade against. Instead, we appear set to gap higher, with the ES up about 20 handles as of 7:00 a.m. ET.
How much of a bounce can this become? I am leaning toward selling the initial rally, with a focus on the 4000 level, and 4020 to 4030 zone. On the downside, I have support at 3965 to 3970. Full levels down below.
Remember, just because it’s moving doesn’t mean you have to trade it. Wait for the big zones and fat pitches down the middle. Trade your edge.
MiM and Daily Recap
The ES traded up to 4041.75 on Globex and opened Wednesday’s regular session at 4035.75. After the open, the ES traded down to 4029, rallied up to 4047.75, chopped around for a few hours and traded 4036.25 at 1:57. After the Fed raised .25 bps, the ES rallied up to 4066, sold off down to 4035.50, rallied back up to 4057.75 and then dropped down to 4022.
From there, it popped to new highs at 4073.25 at 2:45, cratered to ~4005 at 3:05, ripped to 4047.50 at 3:15, then plunged into the close.
The ES traded 4004 as the 3:50 cash imbalance showed $1.1 billion to sell and traded 3969 on the 4:00 cash close. After 4:00, the ES calmed down and settled at 3971.25 on the 5:00 futures close, down 65 points or 1.62% on the day.
In the end, it wasn’t just the Fed that didn’t cooperate, it was the banking sector (KRE, down 5.6%) that got killed. In terms of the ES’s overall tone, it was a late-day sharp reversal. In terms of the ES's overall trade, volume was low up until 2:00 and then it piled on, with a total of 1.73 million contracts traded.
Technical Edge —
NYSE Breadth: 15% Upside Volume (!)
Advance/Decline: 24% Advance
VIX: ~$21.50
Breadth was bearish, but the VIX hardly flinched, up just 4% on the day.
Yesterday, the ES was rejected from the 61.8% retrace of the current pullback and again struggled in the 4075 to 4080 area. For now, it’s back below last week’s high and trying to hold its shorter term moving averages.
S&P 500 — ES
Downside levels: 3965-70, 3950, 3928, 3900
Upside Levels: 4000, 4020-30, 4043-47, 4065
If we look at the 4-hour chart below, you can see where and why the Globex rally stalled near 4,000. Not only is it a nice round number, but it was the convergence of the 10-ema and 21-sma.
Also, I don’t think we can ignore that the 50% and 61.8% retraces for yesterday’s range are 4020 and ~4033 — aka the resistance range we’ve been trading around all week.
ES 4-hour chart
SPY
SPY was ultimately rejected by the 50-day sma and registered another lower high. It also closed on/near its dead low of the day and is now gapping higher. That’s not my favorite scenario, if I’m being honest.
Upside Levels (SPY): $394.50, $396.50 (Last week’s high), $398-ish.
Downside Levels (SPY): $392 (yesterday’s low could act as a key pivot), $389 to $390, $385 to $385.50
SPX
Yesterday’s low in the SPX is key, at ~3936. That’s also (roughly) where the 200-day sma and 10-ema come into play.
Upside Levels (SPY): 3956, 3965, the 10-ema on the 30-min chart, 3988-4000.
Downside Levels (SPY): 3936 (y’day low), 3917-20, 3895-3900, 3860.
NQ
There’s a decent rally in tech this morning, with AAPL, AMZN, MSFT, Semis, etc. all pushing higher. If the rally in these names fails, then the overall market can feel more pressure. That said, notice how much better the NQ looks than the ES.
Upside Levels: 12,880, 12,925-30, 12,985-13,000.
Downside Levels: 12,675, 10-day ema, 12,440
TRIP
TRIP - bearish engulfing candle yesterday + in a downtrend.
We are getting a little long on the OP today, but I want to call out this short setup.
If TRIP opens above yesterday’s low at $18.88 and trades down through this low, that is a short setup to me. Initial stop can either be today’s HOD (for conservative sellers) or $19.50 (for aggressive sellers) — FWIW I prefer a smaller position size and the latter stop loss.
Initial target is $18.50 to $18.60 for initial trim, out ⅔+ at $18.25-ish.
Open Positions
Bold are the trades with recent updates.
Italics show means the trade is closed.
Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be B/E or better stops.)
** = previous trade setup we are stalking.
FSLR — Down to roughly ½ size here after trims near $206-07 and $210-11.
B/E stop and look to get off more between $213 to $215 if possible.
AAPL — Can move to a B/e Stop regardless of how much or if you trimmed AAPL at all. $161 to $162 was trim-worthy yesterday based on:
As for upside, it all depends on timeframe. If shorter term, anything over yesterday’s high warrants a trim. If longer term, you’ll want $160+ and ideally something close to $164.
DKS — Long on the daily-up at $146.65 — Trim ¼ on any push over yesterday’s high and be down to ⅔ or ½ if we see $149-$150.
Stop at $143 — and keep the Fed in mind here. If nervous/concerned, trim down on size and/or be quick to take profits if opportunity arises.
AMZN** — Fed-day tomfoolery on full display. Keep an eye on that breakout trigger around $101.
A rotation over this level opens the door to $104, then $108-$110.
On the downside, risk could be clearly defined down to ~$98 for conservative bulls and ~$95 for aggressive bulls who use a wider stop.
Go-To Watchlist
Feel free to build your own trades off these relative strength leaders
Relative strength leaders →
NVDA, AMD, AVGO
CRM, GOOGL
MSFT
PANW, FTNT
FSLR
GE
DKS
AQUA
ULTA
AEHR → volatile!
MELI
Economic Calendar
