The market has had a nice run-up ahead of the Fed meeting that begins Tuesday and has the economy on the agenda on Wednesday. With QE3 ending next month, market bulls want to be able to count on a QE4 to support the economy should things fall apart globally or in our own back yard. If Ms. Yellen gives any hint that she won't keep rates low for basically years to come, the market will likely get taken apart. The only reason we hold up is because of Fed action and/or perceived action if need be.
Given that she understands this fully and recognizes the market damage to come if she doesn't say all the right things, I expect her to be very market friendly when her words are heard around the globe on Wednesday. Now, even if she does this, it doesn't mean things are going to be good for the bulls. If the market has a different agenda, then nothing can save it. That's just the reality of this game. Even good news could spawn a sell-off on a given day, so be on watch. As bulls and bears have been giving each other solid blows, with neither falling down, watch for a knockout around the corner for one side. No one knows who quite yet.
The short-term, 60-minute charts coming into Monday were overbought. All of the key index charts were flashing 70 or a bit higher, as the day began. The natural occurrence would be for the market to pull back without a lot of price erosion, while unwinding those key oscillators just before the news from the Fed on Wednesday. It's not impossible to break out from overbought short-term conditions, but, it is, of course, easier to do when the oscillators are set up from unwinding.
The market has had lots of beta, or movement if you will, each and every day. Large swings. I'm not a fan of these types of environments. With the markets overbought, but not ready to fall too hard, it was no shock that we swung around back and forth, although in the red, all day on Monday. A quiet day in the red is really what we saw -- nothing bad and nothing good for either side at this moment in time.
If we study more of the longer-term index charts such as those weekly and monthly charts, they're not very pretty, and, to be honest, it makes you wonder how the market has been holding up for as long as it has. Those charts are nothing short of nasty-looking. Any move back up to old highs would create massive negative divergences. No way around that reality. No chance they won't form.
That said, you can break out and stay with those nasty divergences for a while. Likely not forever, but you can get some time out of them. They don't, however, make you feel warm and secure about buying too much on the long side of the ledger.
When you're buying heavily into powerful, negative, long-term divergences, it should scare you. Scare you enough anyway to at least keep things light. This said, you can play a bit long if something sets up, but you need to keep things very light with very tight stops. No more than 2% for me on any losing trades.
For now, the market isn't screaming long or short, but chances are, they will shortly after the Fed on Wednesday.
Jack Steiman
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