After months and months of the Fed propping up the U.S. stock market, the Fed has changed its tune. And, as we can see, the market doesn’t particularly like this song.
One of the big lessons for traders from recent market action resulting from Fed news that I want to examine in today’s post is that there is an intermingling between the fundamental, technical and volatility analysis. We need to consider all three in creating trades as they are all part of one holistic picture.
Chartists have had great reasons to be buyers for several months as the market has been in an undeniable uptrend: higher highs, higher lows (for what lows there were). It’s been a strong bull market on the chart. It was a bull market that was fundamentally driven by the Fed.
Nothing on the chart indicated a down turn. The downturn that started in the S&P 500 on May 22 was purely fundamentally driven. That’s when the rumblings about potential tapering of QE started. Then, of course, Wednesday brought us the news straight from the horse’s mouth that QE tapering would indeed become a reality.
The charts set up new and bearish patterns to reflect what has gone on fundamentally. Yesterday’s close in SPY below the very important pivot point of $160 was hugely significant. The market, as we can see already from today’s action, is likely to have a hard time rallying back above that newly established resistance level of $160.
But what is also significant is that the VIX is hovering around 20, a reasonably high level.
This all creates a set up for selective call credit spreads which benefit from a ceiling on prices that will be in place from the Fed not propping up the market when there is favorable economic data. And it is somewhat in place with technical resistance. Plus, the lofty option premiums resulting from high implied volatility make a ripe environment for option sellers wishing to capture more time value.