February 1st, 2023

What Past Fed Announcements Tell Us The Market Will Do Today

Watch out – this article is going to have some math.

Here we are once again on Fed Announcement day. Most of the folks in the WallStreetBets camp loaded up on puts, and I have to believe they aren’t liking that position too much after yesterday’s greater than 1% move.

The market is expecting the Fed to announce a 0.25 basis point increase and I don’t see them doing anything different, but the key will be in the press conference afterward. That’s usually when we get the statements like, “higher rates for longer” or “more pain in the market” (I’m paraphrasing here).

With the work that the Fed has been doing to fix inflation, I doubt they are happy seeing the market up 5% in a month. The last thing the Fed wants to do is to let up and have inflation come roaring right back. That’s why I think you’ll get a 0.25 basis point hike, but some firm warnings during the press conference.

We’re all traders here and like data, so let’s look at what history has to say about Fed Announcement day. This is a similar chart to the one I made a few days ago, but this time I added how the market traded leading up to the day of the announcement.

What you can see is that the day before the announcement was made, the market was essentially split -> 3 out of 7 times going up and 4 out of 7 times going lower the day before the announcement was made.

There was only 1 out of 7 times the market went up the day before the announcement and finished higher the day of the announcement, and that was March of 2022 when all of this started.

Here’s some good news though. If you look at the two times the market rose the day before the announcement but fell the day of the announcement, the max net change between the two days was -1%. On 6/15/22 we gained 0.69% and on 6/16/22 we lost 1.65%, so a net loss of about 1% over two days.

Ok, but what if the market goes higher?

The SPX (S&P 500) is sitting at 4076. Now, here’s where the chart gets fun. Are you ready?

Back in March the SPX rose by 1.68% and then had another 1.53% gain the day of the Fed announcement. We experienced a 1.38% gain yesterday, so should the market move higher today, where might it go? Let’s say maybe another 1.5%. And what is a 1.5% gain on 4076?

That would get us to 4137 and wouldn’t you know that 4137 is the top of the upward trend channel we are in right now!

Of course, we can go lower too. You can see the uptrend channel intersects with the long-term downtrend around 4000, so don’t get discouraged even if we fall 1.8% down to 4000. It won’t feel great, but only a bigger move lower would put this rally in jeopardy.

The trade of the day is a stock-only trade and it’s Coca-Cola Europacific (CCEP). The stock has been on a nice run since the beginning of November 2022. We saw a slight waver below the 20-day moving average, but momentum is turning once again. I’m looking for strength through the week of February 20th.

I’m looking for a rise of about 4% up to the recent swing high of $57.61.

Why is it a stock-only trade?  There’s no open interest going out to the March expiration.  Zero.  While traders may not be looking that far ahead yet (have I mentioned the Fed enough times?), the February expiration only gives us 17 days to be correct on the move, and that’s not enough time for me.

As much as I love options trading, sometimes it’s fun to go back to where you started and just buy some shares.

I’d keep a fairly tight stop on this – look for support at the 50-day moving average of $54.47. It’s time to move on if it breaks that level and trades lower. Depending on how the market opens and where the stock goes, I might be even more aggressive with a stop loss and use the 20-day moving average since I’m only targeting a 4% gain.

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Jeff Wood

Editor, Filthy Rich Dirt Poor

Trader, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.