Pre-FOMC Announcement Stock Market Drift

Paper Documents Large Average Excess Returns Leading Up to FOMC Announcements

Paper Documents Large Average Excess Returns Leading Up to FOMC Announcements

You may be interested in this 2013 paper, which documents large average excess returns on U.S. equities starting the day before the announcement of monetary policy decisions made at scheduled meetings of the Federal Open Market Committee (FOMC) since 1994.

These pre-FOMC returns have increased over time and account for sizable fractions of total annual realized stock returns.

Real Simple Set-Up

Either ES Forms a Head & Shoulders Here with a Neckline at the Big Triangle Top and Breaks Out Downwards Through It, Or It's Heading Into Part 3 of a Mini Sornette Bubble

Head & Shoulders with a Neckline at the Big Triangle Top vs Part 3 of a Mini Sornette Bubble

ES has a potential head and shoulders formation on its chart with a neckline at the top of the triangle it had formed since February.

But the late day melt-up also qualified as Part 2 of a mini Sornette bubble.

So, ES should retrace at least into the area of the potential H&S left shoulder. If it fails to make it back to the potential neckline at the triangle top, and instead breaks out upwards past the high before that retrace, it’s in Part 3 of the Sornette bubble with a target at the purple megaphone top where it would put in the final little topping megaphone before a correction to the area of the October low.

En route to that megaphone top and another new all-time high, it could put in a false top at the area of the current all-time high and retrace to the megaphone VWAP at ES 2110 before continuing to the new high.

If instead we see the little H&S form, short on the downward breakout for a big move.

Tomorrow’s the FOMC announcement.

FOMC Scenarios

Potential Triangle Right Shoulder, Potential Inverse H&S Right Shoulder

Potential Triangle Right Shoulder, Potential Inverse H&S Right Shoulder, Potential Lower Low

ES may be forming a triangle here, which would be a triangle right shoulder on its inverse H&S.

Or it may be forming an inverse H&S right shoulder here, which would mean a deeper dip this morning.

Or it could still go for a lower low here for this correction.  (That is a less likely scenario because of the formation at the current low of this dip.)

Any of those are bullish for immediately after the move or formation completes.

A right shoulder triangle on an inverse H&S tends to break out upwards.

A lower low here would just complete a larger falling megaphone and make a new high more likely after.

The most bullish scenario would be a tag of the bottom of the potential new price channel (orange on chart) followed by a new high within the channel.

During triple witching the SPY put-call ratio usually closes Thursday at or through the ratio’s bottom Bollinger Band, and it gets there on a rally.  The FOMC announcement is an obvious potential catalyst.

The easiest play here is to be out of the market until it makes a breakout through the top of the falling megaphone.  That’s the bright blue falling trend line that ES is now massing against.  The breakout would be a set-up to go long to roughly the current high.  The massing itself suggests a breakout imminent.

If ES confirms the new orange price channel, the target may change.

If ES should complete a triangle here and break out downwards from it (unlikely), that would be a set-up to short to a probable lower low.

SPY Put-Call Ratio Unchanged

The SPY put-call ratio moved from 1.68 to 1.72, so it’s basically unchanged.

There was a moderate rise in open interest, so both bulls and bears were digging in, but not hugely, and at a reduced rate, as both SPY put and call volume dropped by roughly 40%.

Triple witching still favors the bulls for a run at the current high and likely a squeaker new high, but don’t expect anything beyond that unless the Fed comes up with something juicy.

The FOMC announcement is tomorrow.