Powell Will “Keep At It” — But Who Cares? Focus on the Price, Not the Policy

Justin Nugent

This article was last updated on 09/21/2022.

FOMC

Brief Overview of September FOMC

  • Fed issues 75 basis point rate hike
  • Fed median forecast shows rates at 4.6% in 2023, 3.9% in 2024
  • Fed inflation forecast:
    • 2022: 5.4%
    • 2023: 2.8%
    • 2024: 2.3%
    • 2025: 2.0%
  • Fed GDP growth forecast:
    • 2022: 0.2%
    • 2023: 1.2%
    • 2024: 1.7%
    • 2025: 1.8%
  • Between 100-125 basis points of rate hikes are to be issued before the end of the year
  • Powell:
    • “Housing market must go through a correction”
    • “Commodity prices may have peaked”
    • “Chances of a soft landing are likely to diminish”
    • “No one knows if we will enter a recession, or if so, how deep”
    • “At some point, we will slow the pace of rate hikes”, dependent on incoming data

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Unusual Options Activity
Read on to learn about the bearish bets that the “smart money” institutional traders were loading up on ahead of the FOMC freefall.

Fed Issues 75 Basis Point Rate Hike in September

On September 21st the Fed issued another 75 basis point rate hike, in line with market expectations. At 2:30 PM EST Fed Chair Jerome Powell began an even-keeled speech where he once again told the audience that the Fed will keep at it. The phrase “keep at it” may sound familiar by now. Powell used this phrase multiple times at Jackson Hole, and two more times during September’s FOMC. It wasn’t by accident. This is a specific, intentional homage to Paul Volcker, the famous Fed hawk whose book is called…

Keeping at it. Source: Amazon

Powell also went out of his way at the question-and-answer portion of the FOMC meeting to say that the Fed’s message has not changed since Jackson Hole. Though he did offer a glimmer of light at the end of the tunnel when he acknowledged that “at some point” it will become appropriate to slow the pace of Fed rate hikes. Just not any time soon — the Fed still sees between 100-125 basis points of additional rate hikes before the end of the year.

However, as we have said in the past, hanging on Powell’s every word and dissecting the minutia of Fed policy is an exercise in futility. The only thing that matters is price actionwhat the market is giving you. Trader’s didn’t need to pay attention to Powell to navigate the market during September’s FOMC event. One look at the chart would have told you everything you needed to know.

SPY Gets Rejected at the $390 Resistance Level

SPY 2022 Technical Levels

Source: TradingView, Market Rebellion

We’ve written multiple times this month about the importance of the $390 technical level for the market. When SPY broke below the $390 level on September 16th, it was a giant flashing warning sign for the bulls. Today’s retest and rejection at $390 confirmed that resistance, setting the stage for a 100+ point intraday reversal for the S&P 500. That fall is likely to continue another 3-4% as the market progresses toward the June low. The June low — the lowest point since 2020 — is almost certain to be the next battleground between bulls and bears.

If the market can find support at the June low (the red line on the above chart) it would likely be seen as a bullish double bottom pattern. Double bottoms offer investors who “missed the boat” a second chance to hop aboard. And they help bulls to draw a “line in the sand” that a stock should not cross below. A successful retest and bounce there would likely bring the market back to the all-important $390 level — a technical area that the SPY ETF just can’t seem to get away from. However, if the S&P cuts through the June low, look out — we’ll be in uncharted territory. In other words, “No support in sight — Better hold on tight!”

How We Used Options and Technical Analysis to Exploit the Bearish Breakdown

On the morning of September 13th, following the sky-high August CPI report, we wrote about the bearish technical trade set-up in SPY.

An excerpt from the linked article above, posted in the premarket with SPY trading at $404.24 — more than 7% above where it closed on the 21st. Source: Market Rebellion, TradingView

In the post, we identified a high-velocity premarket move, overbought market conditions, and the same key level of support at $390 that was now rapidly approaching. A level that we said was likely to give way as the vicious selling commenced. Market Rebellion doubled down on that call again on 9/19 when we posted this piece in the premarket about the technical weakness seen in all four indices. In it, we identified several bearish engulfing candles, a break in the support we referenced above, and a bear flag in QQQ and DIA.

“The FOMC meeting is likely to act as a bearish catalyst for a poorly-positioned market. As they say, “the trend is your friend”, and right now, the trend looks bearish.”

Of course, we weren’t alone in making this call. Between 9/13 and 9/20, we highlighted ten bearish unusual options activity trades that “smart money” institutions were loading up on.


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Then and Now: Reviewing Last Week’s Bearish Unusual Options Activity

In the same “Look Out Below!” article from September 13th, Market Rebellion highlighted three bearish unusual options activity trades that we identified immediately following the August CPI report.

bearish unusual options activity
Source: Market Rebellion

All three of those unusual options activity trades are still active today:

  • 5,000 10/28 $115 strike META puts purchased for $1.20 per contract (Total trade value: $600K)
    • Those contracts currently trade for $2.13 (Total trade value: $1.065M, +177.5% since the initial trade)
  • 11,000 9/23 $140 strike META puts purchased for an average of $0.57 per contract (Total trade value: $627K)
    • Those put contracts currently trade for $1.70 (Total trade value: $1.87M, +198.24% since the initial trade)
  • 15,000 10/07 $395/$380 strike SPY put spreads purchased for $4.25 per spread (Total trade value: $6.375M)
    • Those spreads currently trade for $9.41 each (Total trade value: $14.115M, +121.41% since the initial trade)
  • 5,700 9/23 $130 strike NVDA puts purchased for an average price of $2.40 per contract (Total trade value: $1.368M)
    • Those put contracts currently trade for $1.68 (Total trade value: $957.6K, -30% since the initial trade. While theta has certainly eroded some of the value in these put options, shares of NVDA have fallen -4% since this trade was made — and are now just two dollars above the $130 strike price. With two days remaining to expiration, there’s still time for NVDA bears to claw back a victory here. If not — that’s okay! You can’t win them all.)

If that wasn’t enough, Market Rebellion identified seven more massive unusual options activity trades on September 20th in five different ETFs.

An excerpt from the September 20th article referenced above, where we identified 7 instances of bearish buying in five different recession-sensitive ETFs. Most of the buying identified in that article took place during September 19th’s minor rally.

The Bottom Line: Trade what you see, not what you want to see

This is a common lesson that we preach at Market Rebellion, and it’s a pitfall that a lot of traders and investors fall into. If you sit in front of Finance TV for too long, it becomes easy to get wrapped up in the drama of it all. Forget all of that. Forget the doomsday scenarios, forget the macro narratives, and stop trying to “out-think the market”. Instead: Start trading what you see. If you see massive order flow rolling in, consider trading it. If you see a fast-forming uptrend or downtrend, consider trading it. If you see a technical breakout or breakdown above a key level of support, consider trading it.

We’ll say it again: Trade what you see — Not what you want to see.

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