Market All Time Highs Did Not Hold on First Fed Meeting of 2024

Tom Gentile

Posted in
Newsletter

By: Tom Gentile
February 7th, 2024

6 mins read

Originally published via our newsletter previously. Subscribe for early access!

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Today the Fed announced what everyone was pretty much expecting and that was they are leaving rates unchanged. Another item the markets were expecting was for the Fed to NOT start cutting rates at this meeting.

The expectation is they will do their first rate cut in March.

What was NOT expected it seems was Fed Chair Powell saying that based on the info at the time of this meeting and the data the Fed is using to help them decide what to do on interest rates he does not see the group cutting in March.

The market hates surprises and that sure did come across as a surprise based on the markets sold off a lot shortly after that dialogue from Fed Chair Powell.

The continued its sell off right up to the close. He didn’t say they are definitely not going to cut in March, he just said right now he does not see that as a likely scenario.

Didn’t matter, the markets didn’t like that commentary and it causes uncertainty and due t said uncertainty the markets sold off.

My analysis now will be, if the markets continue to sell off where might the next support level kick in? I talk about that on the Market in Focus page coming up. I will take a Fibonacci Retracement viewpoint.

Tom Gentile
C1P: Chief 1-Percenter


Market in Focus: SPY – SPDR S&P 500 ETF Trust

SPY 09-12-2023 to 01-30-2024

The question now is will the market continue to sell off. And if it does where might it find support. I bring in the view of Fibonacci Retracement levels to help assess that.

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I am not saying it will sell off more, but I want to be prepared in the event it does.


From the Desk of a CMT – Gold Case Study

GLD has yet to make a cross of the center linear regression channel line; however, momentum has turned bullish, and the middle channel line can be used for now as a nearby exit point if GLD encounters resistance at that level. This case study (which is not a recommendation of any kind) will use a time filter to confirm resistance and give the GLD the opportunity to break above it. A max risk level will still be used as an overarching exit.

Once again, these are the elements to consider:

  • Monitor conditions and respond to what is for the markets (objectively)
  • Determine the allocation for the position and
  • Manage risk if conditions change or
  • Take profits 

Figure 1 provides a current view of GLD with the linear regression channel (start: 10/14/2022, end: 10/6/2023), the rate of change with its moving average (ROC: 14, 7), and volume bars with a 20-day moving average. It closed at 188.59 on 1/30/2024.

Figure 1: GLD with Linear Regression Channel and ROC (14, 7) and Volume
Figure 1: GLD with Linear Regression Channel and ROC (14, 7) and Volume

The last article displayed a linear progression to 193.565 for GLD by March 1st, and we’re going to continue to use this level as an objective projection, not a probability. The next page provides a magnified view of the current set-up, followed by a view of GLD implied volatility (IV).

It adds horizontal lines for the objective projection level and the most recent closing low for GLD for two exit possibilities. Always understand relative IV levels before opening an option position – the IV chart in Tom’s Options Tools is an easy way to assess conditions for an appropriate strategy.

It’s worth repeating, relatively low IV currently provides the flexibility to be long premium but remember moves upward can also cause IV to increase.

Figure 2: GLD with Linear Regression Channel and ROC (14, 7) and Volume (1/30/2024)
Figure 2: GLD with Linear Regression Channel and ROC (14, 7) and Volume (1/30/2024)

On a short-term basis we can objectively say volume is declining to 1neutral (downward to sideways trending moving.

Figure 3 provides GLD 30-60 at the money (ATM) IV as of the close on 1/30/2024. Since this article is written two days before the market opens, be sure to review conditions before building your strategy. The chance of the same set-up existing two days later is highly unlikely. If the method resonates for you, see how you can implement it given conditions.

GLD IV is relatively low which allows for long premium via a single leg call option or a bull call spread. What if your assessment of price action favors sideways price action for GLD? What objective tool would you use to display that for your time horizon? Would a calendar be suitable for you?

Figure 3: GLD Implied Volatilities (IVs), 30-60 day (1/30/2024)
Figure 3: GLD Implied Volatilities (IVs), 30-60 day (1/30/2024)

Once again, the Smart Searcher is deployed – please see last article if you need a refresher on accessing the tool. Both a call option and bull call spread will be monitored. The long call will simply be the long call from the bull call spread smart search result.

With a preference for an April expiration for the case study, the first April spread was selected.

Figure 4: Bull Call Spread Results on 1/30/2024, Scrolled Down to April Result
Figure 4: Bull Call Spread Results on 1/30/2024, Scrolled Down to April Result

This case study will assume an allocation maximum of 4% on a $25,000 portfolio, which allows for 4 contracts for the April spread ($230 x 4 = $920, 3.7%).

A max risk of $375 will be used, keeping in mind that any specific level is always difficult to achieve with potential gaps up or down overnight; however, an exit at the $135 level per spread or below is one exit rule. Here are some other considerations:

  • How would you use the $185.84 level which is the most recent low? Is this an exit trigger? Would that be used with a single close below this level or two closes to confirm?
  • What about the current bullish momentum set-up? If the moving average moves back down below the ROC would you use that for an exit?
Figure 5: Case Study Data with Bullish Momentum on 1/30/2024
Figure 5: Case Study Data with Bullish Momentum on 1/30/2024
Figure 6: Case Study Risk Charts on 1/30/2024
Figure 6: Case Study Risk Charts on 1/30/2024

When thinking about exits for a loss an important consideration is, have conditions changed since your entry?

Meaning are the reasons you got into the position no longer valid, in this case bullish.

A move below a recent low and a bearish cross of momentum both signal such a change. What about resistance at the center channel line? Here’s the approach for the spread case study:

  • Momentum will be used to signal changing conditions and could result in an exit for a gain or loss
  • Since the center channel line is trending upwards, even if it serves as resistance, price could be rising.

A long call would have to be approached differently. Minimally, a timed exit of 30 days to expiration should be used to reduce the negative impact of IV decay.

1/30/2024 Case Study:

  • Buy to Open 4 GLD Apr 19 188 call
  • Sell to Open 4 GLD Apr 19 193 call for a net debit of $920

Exit for a potential gain:

  • A bullish move is followed by a bearish cross of the ROC moving average below the ROC line
  • A move to 193.50 for the underlying by March 1, 2024
  • 30 days to expiration (conservative, long premium)

Exit for a potential loss:

  • A bearish cross of the ROC moving average below the ROC line
  • 30 days to expiration

What rules would you use to manage risk management and profit-taking for a long call only position? That will be reviewed next week along with an update to this case study, as appropriate.

Regards,
Clare White, CMT


Thank you Clare!

Tom Gentile
C1P: Chief 1-Percenter


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