Table of Contents
Yes, it happened. JPow flat out said what we all knew all along. Hats off to the man for pushing the right levers yesterday.
For once,
something good has been done
for the global economy.
That’s a first
in a very long time.
Feel free to review the FED Press Conference from yesterday (transcript here), I encourage you to do so.
But if you want my summary, here it is:
- The tightening efforts by the FED had basically no effects so far. They achieved nothing.
- The inflationary push is sitting right where it was one year ago
- There is no relief in sight. Forget about it.
- The FED does not know the future target of the interest rates at which the tightening efforts will decrease…
- … and even when that is achieved, the FED has no idea for how much time that restrictive condition will be stably maintained.
- The only sure thing is that, as per inflation readings, it is clear that said target is higher than anticipated.
*tadaaaaa*
So what do you know, after all yesterday there was – indeed – a FED pivot. It happened!
Except, it was a hawkish pivot.
Market analysis
So what happened in response to the news?
The market as a whole performed a glorious stop hunt, and this can be seen across all securities, and proceeded to dive down, closing at its low of the day. After-hours trading with big volumes, still to the downside. The Asia session continued this trend, and at the time of writing this, the EU session is resuming it.
A complete shit-show, lots of people just crapping their pants.
Luckily not Yours Truly here, and some other people reading these pages.
| DXY (US Dollar) | UP 1.3% since yesterday’s open | Bearish for equities,commodities |
| VIX | Starting to form a bottom at 26 | Bearish for equities |
| US 2-year yields | Sprinting towards 5% (UP 4.5% since yesterday) | Bearish for equities |
| Gold (GLD ETF) | -1.30% back at 152 | Gold says “Told you so” |
| Crude oil | Closes above 89 | Unimpressed by all attempts to take it down |
The stop hunt
The initial algorithmic response to the confirmation of 75bps rate hike (i.e: no FED relief) was a massive upward jump in valuations. This can be seen in yesterday’s chart for all securities.
This merits a short discussion: as soon as the data was out, even before the Press Conf Q&A session, the market proved its pivot thesis wrong. It should have dove down right away. Why did it react like it did?
The answer is: liquidity.
The market making system, (i.e: the algos that deliver asset prices) can suddenly find a consensus to execute a liquidity gathering scheme. Yesterday this was exactly the case. I will show you what I mean with yesterday’s DXY chart, as a prime example, but this occurrence is so blatant that you can spot the same exact structures and behaviours across all securities.
Here is a snapshot of DXY the instant before the news broke (click to magnify):
What do we have?
- (Oct 26) a bearish market is ended with a reversal. In order to gain upward liquidity, market movers usually perform a stop hunt to take out positions which were previously held by bullish traders.
- (Oct 27) The upward movement is confirmed, a new market starts and traders enter long positions as soon as there is confirmation. This also establishes a new price bracket of SELL-STOP protection orders below a clear entry level.
- (Oct 31) A local top is discovered. This establishes a price bracket of BUY-STOP orders across that level.
- The market stays in this range until the FOMC meeting.
What happened after the news?
A number of typical things. I dare you to find a chart in any security where this doesn’t happen at least once a week. (Save for Crypto. Crypto is much much worse than this).
- (Nov 02, 18:00 UTC) A “relief” movement starts. The direction of this movement initially counters the meaning of the news triggering it, but it is joined by a large portion of traders sitting in the sidelines due to its magnitude. This is DXY, so a bearish candle is actually bullish for equities, commodities and everything that isn’t US Dollar.
- The “relief” movement continues to take out SELL-STOP orders below an established entry level. More traders interpret this as a confirmation and join in or reverse position. This of course happens right at the top (or bottom in this case) of the movement
- (Nov 02, 18:30 UTC) The price delivery inverts its course, a new order block is executed to invert the momentum. It is important to understand this: no amount of retail participation can counter an algorithmic price delivery consensus. The price inverts its course and that’s it.
- The majority of traders are locked out of the market, or in losing positions.
- (Nov 02, 19:00 UTC) Prices are delivered in the initially intended direction. This causes BUY-STOP orders to execute, gathering more momentum for the new market.
And just like that, market movers deliberately f*ck both parties of the game, take their money, and go where they intend to go.
Heatmap
Big algo dump, relentless, a sea of red. But SOME names managed to close in gain.
Let’s track them, and let’s see tomorrow if the market continues to pick them up.
Options
Volumes are low again, and bearish bets prevail. This confirms a change in market direction. Big bets against Tesla and Apple, for sure, but one can clearly see the theme: the Big Techs are all in focus. They must all go down.
Did they get the memo?
Look, I don’t know. This remains relevant, and the markets are gonna flush down BIG in the near future.
But when, and how? There is no way of saying.
But What i DO know is this (Nasdaq via QQQ):
We are looking at the weakest index, Nasdaq, which is tech-heavy. And where did it go up until yesterday? It went up.
What is clear is that since its last low, the market shrugged off all blows thrown at it, under the assumption that easing conditions from the FED were in, to be delivered.
Except for yesterday. Because the pivot didn’t happen.
And like in previous instances, the market promptly proceeded to crap itself and change its course.
What happens next isn’t clear. Bears are now clearly in control but I wouldn’t bet on them staying there for good. For multiple reasons:
- Institutionals are only paid fat bonuses when they earn money. And most of them didn’t even see a bear market before. They are accustomed to all things ever going up. And, consequently, they are now holding large bags in the red, and they all want some revenge before the year ends.
- Russia and China are both potential sources of relief, should anything positive happen on either of those fronts.
- The seasonality leading to the customary Santa Rally is in.
If the market decided to range from now and until the next CPI reading, that wouldn’t surprise me.
Trade scratchpad
- $MPC trade untouched (30%). Retracement assumed not ended. Waiting for confirmation to add.
- $VLO closed in gain during yesterday’s FOMC peak. Movement wasn’t consistent with the news. That was a good call.
- Sitting on the sidelines for market to show direction. Looking at Healthcare stocks, Consumer staples.