Tomorrow’s Fed meeting could force an 11% drop in QQQ
Investors are forgetting the cardinal rule of trading: Don’t Fight the Fed…
Take Carvana Co. (CVNA) rocketing up 58% in a single day.
A move like this should NEVER happen on a hot garbage stock like this, yet it did…
It’s proof that people are willing to trade aggressively even with the Fed telling us to be conservative with their rate hikes.
And one of Morgan Stanley’s top analysts Mike Wilson – you know, the guy everybody’s looking at because he’s called every rally and top within a day or two since the bear market started – says this week could serve as a reminder of that rule.
Heck, even our in-house genius Garrett Baldwin has been blowing this horn, as this market has rallied right up to tomorrow’s Fed meeting.
The entire market rests on the speech after the announcement.
We all know the rate hike we are getting by now (it’s .25% if you don’t), so the only possible change in the market will come from our buddy Jerome Powell’s commentary.
Is he going to stay hawkish, give us a subtle, maniacal laugh, and explain that they are going to continue down their path until we stop resisting?
Or are we going to see him hit the podium with a glowing aura about him and say this is the last rate hike and the Fed is going to pivot sooner than expected?
Everybody is on the edge of their seats, waiting.
Regardless, there are only two possible outcomes – I’m going to show you the key levels to watch in order to profit from any scenario.
It’s likely we see the Fed stay down the path of raising rates.
Even the most dovish of the voting members have been saying they need to stay on course and make sure they get the job of squashing inflation done.
If the Fed comes out and says they expect at least two more hikes in the coming months before they consider stopping – and this is the likely scenario – Mike Wilson will be right again, and this rally will come down hard.
Traders and investors are going to start causing a bit more of a ruckus in the market, as they will be disappointed in the Fed’s choices.
When this happens, the disappointment will play out in the market in the form of a break back below the 200-day moving average (MA200) on the SPDR S&P 500 ETF (SPY), bringing us under the $390 level with a 3.25% drop.
You’ll also see a drop below the MA200 on the Invesco QQQ Trust Series 1 (QQQ). When this happens, it will test the $280 level.
Once it breaks that level, look for a target of $270, as that is the peak put Open Interest price for the February 17 expiration cycle and, not by coincidence, the top of the regression channel by which the QQQ has been abiding for the last year.
There will be support at that level, and the only thing that can break that support is earnings season and continued lower guidance from big companies. If it continues, we could see a reading as low as $260 on QQQ.
As I said earlier, there is a second, albeit less likely, way this plays out.
The Fed could well turn dovish.
In the unlikely event, they back off and give the market a rest, QQQ becomes a fast ride to the upside, breaking above the $300 level and hitting the 50% Fibonacci retracement. In this scenario, your target should be $320.
This is the one thing that could turn this rally into a trend and outshine earnings season. But I cannot stress this enough – it is unlikely we see this happen.
I am personally going to be holding off on trading ahead of the Fed so we can have a more vivid picture of how this plays out.
After all, with my trading style, your job right now is not to get into new positions to capture profits… That can be a dangerous game.
The trades are already in place, and you are prepared for the announcement.
Now, we need to confirm that our trades are prepared as well.
Ask yourself if you would still get into our positions today. If the answer is yes, great; if the answer is no, you need to trim the fat.
This is a pivotal step to take as we approach events such as the Fed.
The beauty of binary scenarios like this is you only need to prepare for two possible outcomes.
Watch for the commentary and trade for the levels I laid out above.
And remember, the Fed is focused on one thing right now, and it’ll be done soon, but not yet.
Be sure to join me in the Night Trader room tomorrow. I am going to open it up for everybody so we can dig further into the implications of the Fed announcement and exactly which moves to make to profit from it.
January 31 2023