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.

ES Inverse H&S Targets Squeaker New High

Inverse Head and Shoulders (Red Neckline)

Inverse Head and Shoulders (Red Neckline) Targets Squeaker New High

So now there’s an inverse head and shoulders on the ES chart that targets a squeaker new high.

We’ve probably settled into a Fed vigil here. A triangle would be nice.

Once again, by Thursday close the SPY put-call ratio would usually be at or through its bottom Bollinger Band, and it would usually get there in the context of a continuing rally.

SPY Put-Call Ratio Falls

The SPY Put-Call Ratio Fell to 1.68 on Monday

The SPY Put-Call Ratio Fell to 1.68 on Monday

The SPY put-call ratio fell to 1.68 today on a moderate drop in open interest. That’s well below the ratio’s 20 dma, but still a little above its long-term average by opex Fridays.

And the ratio tends to drop to or through its bottom Bollinger Band by Thursday of triple witching weeks.

So, the ratio is still generally bullish for prices (though less so), but weak as an indicator for tomorrow.

SPY put volume fell today by 29%. SPY call volume fell by 6%. So the day’s move had a lot of short squeeze in it.

FOMC meets tomorrow, tells us whether or not they’re patient on Wednesday.

SPY Put-Call Ratio Back Up to 1.74

SPY Put-Call Ratio Rose to 1.74 on Tuesday

The SPY Put-Call Ratio Rose to 1.74 on Tuesday

The SPY put-call ratio rose to 1.74 today, above its 20 dma. That would tend to be bullish going into opex Wednesday. It’s especially bullish for a December opex week, because we’d tend to see the ratio down at its lower Bollinger Band by Thursday.

SPY put volume rose by 8% today on a strong rise in open interest.  SPY call volume fell by 3%.

Tomorrow’s the FOMC.  I cannot understand how anyone can think Yellen’s Fed is about to say something bearish with 8 shopping days left till Christmas.

 

SPY and ES Potential Short Set-Ups with Potential Target of ES 1350

Potential Head and Shoulders Short Set-Up for Downward Breakout from Topping Megaphone

ES Potential Short Set-Ups (Will Be the Same for SPY)

ES Potential Short Set-Ups (Will Be the Same for SPY)

These are the potential short set-ups for the correction we’re likely to see after NYMO closed over 80 for the second time in four days on Friday.

On Friday ES broke out of the bright blue price channel on its chart and began forming a potential triangle or head and shoulders there.  SPY has the same price channel on its chart and has started the same potential top.

Either the little triangle that started forming on Friday on top of that price channel will complete and break out downwards (green scenario), or it is likely to morph into a little head and shoulders (navy blue on chart) with a neckline near the top of the price channel.  The little triangle could also break out downwards a bit, then reverse and form the little head and shoulders.  ES and SPY could also crawl along the price channel top a bit, completing a final rising wedge across that top.

A downward breakout from any of those patterns is sufficient to start a short position.

Assuming we actually see a little topping pattern like this and it breaks out downward as expected, it will likely be the top of the head of a larger head and shoulders topping pattern on the chart.  The head and shoulders would have a neckline at roughly ES 1955/SPY 196 (green scenario).

The red horizontal line on the chart below at ES 1955/SPY 196 is the VWAP of a 5-month megaphone that could be a topping megaphone.

VWAP of the SPY 5-Month Megaphone (Red) is at Roughly 196

VWAP of the SPY 5-Month Megaphone (Red) is at Roughly 196

One of the most bearish things you can see on a chart is a head and shoulders pattern with a neckline at the VWAP of a potential topping megaphone. A head and shoulders pattern in this position usually breaks out downwards, with a target of a breakout through the megaphone bottom–a breakout that will keep moving down.

If you don’t short on a downward breakout from a little topping formation at the top of this potential H&S, do not miss shorting a downward breakout from the larger H&S.  Or at least exit longs.

Correction Targets

In this case, the breakout target would be the bottom of the long-term purple megaphone on the SPY chart (see below) at roughly the VWAP (horizontal navy blue line) of the three-year rising wedge (navy blue).

Target would be the Bottom of the Purple Megaphone (at VWAP of the Navy Blue Long-Term Rising Wedge)

Target would be the Bottom of the Purple Megaphone (at VWAP of the Navy Blue Long-Term Rising Wedge)

I haven’t drawn it on the chart, but usually you’d see the price break out through the purple megaphone bottom and form a bottoming pattern at or below that bottom, and across the navy blue rising wedge VWAP. You could expect this bottoming pattern to reach the horizontal orange line on the chart, which is the VWAP of the long-term orange rising megaphone on the chart.

Then you could expect a sharp rally back to the purple megaphone VWAP.

Rallies and Dangers

When the market corrected to the 200 dma, Fed members started making public comments about extending QE. Arguably Bullard’s comments on this subject amplified the short squeeze out of the October 15 low.

I can’t imagine Fed members shutting up as the market just collapses to 1350.

On the top chart I’ve drawn sharp moves up at likely rally points (based on existing trading formations on the chart).  In a sense, each of these rallies is a potential right shoulder on a larger head and shoulders.

Any of these potential right shoulder rallies have the potential to break out upwards through their likely topping area, and any such upward breakout would be a set-up to go long for a melt-up.

Also, even a NYMO double close over 80 doesn’t guarantee a correction. The market could be putting in a false top here before a surge to the top of the 5-month red megaphone.

And if the market coiled enough on the way to the red megaphone top, it could be setting up an upward breakout from the red megaphone and a blow-off top right here.

SPY 5-Month Megaphone Scenarios

SPY 5-Month Megaphone Scenarios – Green Coiled Scenario Would Likely Lead to Blow-Off Top

If we’re going to see one of these scenarios, we’ll get a tell as the head and shoulders with a neckline at ES 1955/SPY 196 forms. What will happen is that the right shoulder will turn into a megaphone. We’ll get a fake breakout or two from the H&S, and then it will be up up and away.

Sornette Bubble Part 3

If, by some miracle, the Fed doesn’t break the fall and the market actually gets to 1350, it will have reached its Sornette bubble correction target as well as its trading formation targets. This would complete Part 2 of a Sornette bubble that began forming in March 2009.

Sornette bubbles often (but not always) have a third part. And if the third part is going to happen, it’s the fastest, biggest and most violent of the three moves.

For example, we would often see a bigger move than the move out of the 2011 flash crash low to the high before the correction. And instead of taking 3+ years to get to the top, it may get to the top in something like six months.

The giant vertical move of the dot-com bubble was the third part of a Sornette bubble.

If we don’t see a Sornette bubble Part 3, we’d usually see a multi-year trading range down near the low of this correction.