Two Scenarios For A Potential Correction
Market's reaction to yesterday's FOMC rate decision was as expected... volatility! Usually reactions to FOMC rate decisions are a two-day affair... the real reaction doesn't materialize until the day after the meeting itself. The reaction for the two hours after the announcement is usually knee jerk reaction. So we'll see today how market participants feel after pondering overnight the Fed statement and other factors as well (a sell-off in Asian and European markets).
Looking at the S&P 500 chart, we have clearly lost a lot of momentum since last week. Volatility is ever present once again, after a long absence during the rally from the March lows. The VIX is showing some signs of life after a reversion to mean from significantly high levels. I would like to reiterate that volatility for me is an important sign of distribution, especially given how far the market has rallied.
Right now, we have two scenarios:
1) A rally towards 1,085-1,090 for the S&P 500, or "one last squeeze", before the correction we are calling for ultimately takes hold.
2) We just drop from current levels. The long shadow formed from yesterday's tick respects the resistance from the 32-day moving average and the previous patterns support (turned resistance). So we have some supply hanging up above.
Whether we rally first or drop from here, I still think we test 980 first, then eventually head down to 930. Any downmove will be choppy and will not be a momentum trade. The bargain hunters are still out there to provide volatility.
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