Fumble!

Yesterday the SP500 was trying to get above the 1100 level, and today it appears the SP500 was able to move above 1100 after a few pull back to the 1100 level. In the afternoon, the SP500 starts to pull away from the 1100 level and prepares to head higher by closing at 1106.75. However, shortly after the market closed, the Fed made an unexpected announcement on increasing the discount rate by 0.25% from 0.5% to 0.75%. The result of this surprise discount rate hike announcement hit the index futures on the downside almost immediately.

Using a football metaphor, the price action of the last two trading sessions is like watching two defensive oriented football teams playing against each other in the Superbowl. In the first half, the bulls have the ball and drove the ball from its 20 yard line to mid-field (SP500 1100 mark), and failing to make a first down before they have used up their set of downs, the bulls have to give up the ball to the bears. The bears use their set of downs and drove the ball back to the bull side of the field (below SP500 1100), and failing to get another first down, the bears have to give the ball back to the bulls once again. This defensive exchange goes back and forth for a few times. When the first half of the game (yesterday’s session) ended, the ball is sitting at mid-field (SP500 1099.51) In the second half (today’s session) the bulls finally able to move the ball across mid-field (above SP500 1100), but failing to make first down to keep the drive alive, the bulls have to give the ball back to the bears and the bears attempt to move the ball back onto the bulls’ side of the field (below SP500 1100.) This series of exchange go back and forth for a few times. In the 4th quarter, the bulls were able to make a few first downs on a drive and drove the ball within field goal range (SP500 closed today at 1106.75), and then the unexpected happen, a FUMBLE! (The Fed announced a 0.25% increase in the discount rate)

SP500:



15 minutes intraday SP500:




Now the bulls feel devastated and the bears are jubilated with the new found fortune. This fumble (Fed discount rate announcement) can be a game changer for either side. If the SP500 falls below 1085 like a hot knife cutting butter, then this market is going much lower and the bears claim victory. If the bulls are able to hold the SP500 at or above 1085 and ultimately move it back above 1100, then the bulls will claim victory and look for the SP500 to go higher.

So be prepare for tomorrow, it is options expiration day and those option market makers just received a big gift from the Fed. If the market react like the index futures did in after hours, then they can just let the market free fall to take out all those open interest calls without doing much pinning. I will not be surprise to see extraordinary high volatility for tomorrow. I might just be a spectator tomorrow and watch how this game ends, and then next week I go celebrate with the victor (go long if the bulls win, go short if the bear win.)