Trading the Gap-Up After a Messy Close

Yellen & Powell combine to spark more volatility

Like it or not, a 25 basis point increase was the smart move. As we noted yesterday, virtually any other action would have created major doubts among market participants. Additionally, I don’t think the 25 bps increase is what sparked the late-day selloff — that part was largely priced in by the market. 

Instead, comments from Treasury Secretary Janet Yellen were firing off around the same time Fed Chairman Powell was speaking yesterday afternoon. (Sidenote: couldn’t they have coordinated that a little bit better?)

In any regard, Yellen’s comments combined with the Fed volatility ultimately sparked the late-day selling pressure. The Fed stuck to its guns, essentially echoing its “higher for longer” rhetoric. The Fed sees rates at ~5.1% at year-end and ~4.3% by year-end 2024. Both are meaningfully higher than the market’s current expectations of 4.25% to 4.5% and 3.0% to 3.25%, respectively.

However, rate projections can change and investors know that. Instead, it was Yellen saying that the government “is not considering insuring all uninsured bank deposits” that seemed to rattle investors more. 

In short, the market is more worried about ongoing bank failures than interest rates right now — and it’s not hard to understand why.

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Technical Edge — 

• NYSE Breadth: 15% Upside Volume (!)

• Advance/Decline: 24% Advance

• VIX: ~$21.50

Breadth was bearish, but the VIX hardly flinched, up just 4% on the day. 

Yesterday, the ES was rejected from the 61.8% retrace of the current pullback and again struggled in the 4075 to 4080 area. For now, it’s back below last week’s high and trying to hold its shorter term moving averages. 

S&P 500 — ES 

• Downside levels: 3965-70, 3950, 3928, 3900

• Upside Levels: 4000, 4020-30, 4043-47, 4065

If we look at the 4-hour chart below, you can see where and why the Globex rally stalled near 4,000. Not only is it a nice round number, but it was the convergence of the 10-ema and 21-sma. 

Also, I don’t think we can ignore that the 50% and 61.8% retraces for yesterday’s range are 4020 and ~4033 — aka the resistance range we’ve been trading around all week.

SPY

SPY was ultimately rejected by the 50-day sma and registered another lower high. It also closed on/near its dead low of the day and is now gapping higher. That’s not my favorite scenario, if I’m being honest.