S&P Struggles with Bear Line In The Sand Ahead Of Fed - Morning Market Squeeze

Key Tactical Takeaways:

> Ahead of today's rate decision, the stage is set for a critical test of SPX 3431.70, which is the line in the sand that keeps the September correction in check heading into what is typically a bearish 2nd half of the month.

> Although a clear break still hasn't occurred, we are watching recent yen strength vs. both the euro and US$ as one an indication that there is still a risk-off undertone to this market.   A close < 124.44 EURJPY would lend credence to this idea.

> Now that the VIX has closed back below both its NT trailing stop and the 09/03 breakout point (both in the area of 27.10 to 26.60), < 1-sigma daily ranges are back in vogue until we see a VIX close back above 28.50.

Some Quick Thoughts:

Yesterday, when referring to recent gloomy reports from both OPEC and British Petroleum regarding the outlook for oil demand, we said "Quite often, when such bearish developments hit the tape at such depressed price levels it marks some form of a tradable low." Well, crude oil futures are up another 2.4% this morning, after rallying 2.7% on Tuesday. Technically, this negates the very bearish "pennant" that had been present leading into Tuesday's session. However, pending a close above 39.84, the bearish energy associated with the post-08/26 down-cycle will continue to favor lower prices over the near-term.

Since investors recognize how important the Fed's actions are, trading activity often dries up ahead of key monetary events like today's interest rate decision. When we look at the benchmark S&P 500, its rangy price action is largely a reflection of the mega-cap tech constituents that have become so influential to this cap-weighted index's movement. While S&P 500 and the large majority of its underlying sectors have recently made attempts to rally above the bearish volatility-based trailing stops that trading algorithms pay so much attention to these days, only one, basic materials, has been successful and a bullish breakout. The S&P’s (SPX) stop sits at 3431.70.

As we discussed in this past weekend's Weekend Macro Press, the strong relationship between higher equity prices and periods of Fed balance sheet expansion would make even Donny & Marie jealous. Although the Fed's total liabilities currently sit near a staggering $7T, asset purchases have slowed since June, leaving the balance sheet in a consolidation range. Considering the August price overshoot by the tech names that have become so influential to the benchmark S&P's movements of late, we just think that there is an elevated risk that the September correction may need to mature further before the next big buying opportunity arises. The next day or two should prove to be an important part of this outlook, as any failure by bulls to force a meaningful close above 3431.70 would keep risk leaning toward deeper drawdown during what is typically a weak 2nd half of September. 

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