Opening Print and S&P Levels to Watch

We used to have an old saying that you can always come in late the day of a Fed announcement, but that may not be the case today. As unpredictable as the stock markets are, the Fed can be even more unpredictable. The Asian markets closed mixed and Europe is trading higher after a quiet night in the global markets. This morning's economic calendar starts with the mortgage applications, housing starts and the API.

What we know for sure is that the E-mini S&P futures (CME ticker ESZ) has been on a tear. As of yesterday's close the S&P futures have closed higher 9 out of the first 11 trading days in September and up 7 out of the last 8. Instead of increased volatility and trade leading up to the two-day Fed meeting, we are actually seeing a lull.

Yesterday's 1.4 million ESZs traded sounds low, but when you take out the 400,000 ESZ traded in Globex pre-open and the 550k ESU/Z spreads (S&P e-mini spread), the total day session volume drops down to an astonishingly low 450,000 contracts traded.

S&P 1700, Dow 16,000 and NASDAQ 3800 are all considered big figures. Currently the ESZ has rallied back to its all-time contract highs but has failed to hold above the big figure. What we do know is that all the major indices are trading at or near their respective highs.

The CBOE Volatility Index (VIX) closed below 14 yesterday. The majority of the floor traders we spoke to said they felt the Fed would announce a $10bil taper and that the public has already accepted the idea.

Our view:

Let's face it, the markets are not going to like it when the headlines hit the tape that the Fed is pulling back from QE3. That said, the locals are right, the public and trading community have accepted the idea of the Fed pulling back, but this leaves the question, with the S&P up so much in the last two weeks, do they sell the news anyway?

Then the S&P, like all the other markets around the world, will be waiting on the Fed's next move. If the Fed decides to do nothing the S&P will rally to 1725. If the Fed announces a larger pullback from the program the bottom will fall out.

Our call is to sit on our hands. We want to see how things play out. Remember that not trading is a position. The third possibility is what we call the Fed head fake, meaning that the initial headlines tend to push the S&P initially in one direction. You're supposed to fade the move. To do that, proper timing and a good feel for the market are essential.

As always, use stops and keep an eye on the 10-handle rule. Don't forget to catch MrTopStep on The Closing Print video. We report directly from the SPX pits, wrapping up the day and positioning for trade tomorrow.

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