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Today the Federal Reserve starts what could be one of the most important FOMC meetings ever. The two-day conclave ends at 12:30 ET on Wednesday and is followed by the FOMC announcement and forecasts at 2:00 and Ben Bernanke’s press conference at 2:30.

There is a lot of fear and selling going on in the stock market right now and with the odds favoring a taper it could end up a very long week for the S&P (^GSPC:SNP).

Volumes and net changes

While its hard to argue the ESH13’s overall price action of failed rallies we also can’t overlook the low level of volume and narrow net changes I keep pointing out. Let’s take yesterday’s total ESH volume.

To get to the total day trade volume of the S&P you have to take the total volume of the ESH – yesterday’s was 1.79 million contracts – and subtract the 355k ESH traded in Globex. Then take that number and subtract the total number of ESZ13/ESH14 (S&P emini spread or roll) (556,492) out of that total. Take that number and take out the 60% for program trading (it’s really higher) and then you will have your total volume.

As far as the net changes other than the 22.3-handle drop last week the only other big decline goes all the way back to Nov 7 when the S&P fell -20.4 but closed +20.9 handles the next day. Other than that the single largest down day was on Dec 5 -7.8 handles.

In other words, in the last 26 trading days, aside from the back to back up and down 20 handle days on November 7th and 8th and the December 11th -22.3 handle decline the largest down day was on December 5 when the S&P closed down -7.8 handles.

While there may be nothing scientific to it most traders will agree that when the S&P goes down like this, it generally goes back up.

The Million Dollar Question

It always darkest before dawn. While the bears are smelling blood, and we do feel there is more room on the downside, we also wonder what will happen if the Fed doesn’t come out swinging.

While there is an abundance of reasons for the Fed to taper, the Potomac Research Group says it’s still a close call and that the chances of a Fed taper are above 50%.

But David Mericle from Goldman Sachs says a December tapering announcement is not the consensus and that most economists don’t expect a taper until January or even March. To tell the truth this is more in line with what MrTopStep thinks.

All in the wording

There more than likely will not be any misunderstandings when it comes to what the Fed has to say Wednesday afternoon. For months the PitBull and I have discussed the ramifications of the Fed pulling the plug and starting to taper.

The markets will not like it. We have always questioned what will happen to the stock market and how the Fed will pay back all the money it fed into the system.

Unlike many past two-day meetings this one definitely has a sense of urgency to it. Previous meetings didn’t feel that way. We expect at the very least a modest change to the economic forecast based on lower projections of inflation.

The Asian markets closed mostly higher and Europe is trading modestly lower. Today’s economic calendar starts out with the first day of the FOMC meeting, Consumer Price Index, Current Account, Redbook, Housing Market Index, 2 Yr-note auction and earnings from FactSet. Despite all the hoopla the big show doesn’t start until tomorrow afternoon. That said it does not mean the S&P won’t be moving.

Our view

We have some economic numbers to get past this morning and then the long wait for what the Fed has to say Wednesday afternoon. More than likely things will slow today and for most of tomorrow. I am going to say it like it is: everyone is short and that means there is a potential for going up. You can take it from there.

Click here for the Ned Davis expiration study.

As always don’t forget the 10 handle rule and please use stops …

  • In Asia, 7 of 11 markets closed higher : Shanghai Comp. -0.45%, Hang Seng -0.20%, Nikkei +0.83%
  • In Europe 8 of 12 markets are trading lower : DAX -0.36%, FTSE -0.34%
  • Morning headline: “First Day of the Two-Day Fed Meeting”
  • Total volume: 869k ESZ, 38k SPZ, 1.8mil ESH and 38k SPH traded
  • Economic calendar: . FOMC meeting day one, Consumer Price Index, Current Account, Redbook, Housing Market Index, 2 Yr-note auction and earnings from FactSet
  • E-mini S&P (Sep)1788.50+2.00 - +0.11%
  • Crude97.80-1.42 - -1.43%
  • Shanghai Composite0.00N/A - N/A
  • Hang Seng23069.23-45.43 - -0.20%
  • Nikkei 22515278.63+125.72 - +0.83%
  • DAX9153.24-10.319 - -0.11%
  • FTSE 1006506.56-15.64 - -0.24%
  • Euro1.3764

 Two day Fed meeting begins, but market still open

Source: 2-Day Fed Meeting Begins, But Market Still Open