Before the weakness in the Chinese market I was very certain the Fed was going to raise rates in its September meeting. So I was expecting an initial drop in the market shortly after the report as a result of hotheaded/emotional traders hearing the words “rate hike”. That was to be followed by cool heads/patient traders coming in to reverse it back to the upside due to the fact that the rate hike was already priced in. And also because the cloud of uncertainty was going to be finally lifted off the market.
But on the other hand (still assuming Chinese weakness hadn’t occurred), I believe that if the Fed didn’t raise rates, it would have caused an initial rise in the market following the report due to emotional traders hearing the words “no rate hike”. That was to be followed by cool heads coming in to reverse it back to the downside due to the fact that it would have created great uncertainty given that the market had been expecting a September rate hike for many months. So the market would have been very confused and disappointed.
Now let me fast-forward to today’s trading environment with China as a new factor in the September Fed rate decision making process.
In my view China has greatly altered the expectation of the market. What I now believe is that if rates are raised tomorrow, we are going to see a disappointed market that will make big drops tomorrow and Friday before the healing process (bullishness) starts again next week after the information must have been digested over the weekend and found to really not be as bad as initially interpreted.
The reason for the two-day drop is that it will revive the still very fresh memory of the recent global weakness caused by China at a time when global markets were just starting to calm down from all the wildness that took place the past few weeks.
On the other hand, if the Fed decides not to raise rates tomorrow, I believe we will see massive rises in the global market on Thursday and Friday as a result of the fact that the global market is in desperate need of any good news at this time after all the trouble it just went through. So the Fed will be closely watched around the world by traders, investors and central banks alike.
Another factor to consider is that the IMF has been pleading with the Fed not to raise rates until 2016.
MY EXPECTATION FOR TOMORROW:
I believe the Fed is NOT going to raise rates during this meeting because they understand the damage/panic it will cause to global equities in just two days. I don’t think they want to be blamed by whole world for making the wrong decision. They know all the other central banks will immediately point fingers at them saying “we told you so”.
DOES THAT MEAN THE FED IS NEVER GOING TO RAISE RATES?
I believe the Fed will raise rates in October. At that time China will be distant memory and the market will be expecting a rate hike. So it a rate hike would have been priced in before the next announcement. A hike in October or December will be well received. But anything beyond December will create uncertainty I believe.
MY EXPECTATION FOR THE NEXT SIX WEEKS UNTIL THE NEXT MEETING (ASSUMING RATES ARE KEPT UNCHANGED TOMORROW):
Look for the market to make big upside moves on Thursday and Friday, then a grind higher next week. That is, look for small to tiny bullish days with decreasing momentum next week. In other words, each day’s candlestick will decrease in magnitude/size the higher price goes.
Then look for the market to drop the week after as the market starts wondering again what the Fed will do in its October meeting. Then a rise the third week... This will be in a period of "good" volatility that can be very rewarding for swing- and day-traders. It will not be the wild/useless volatility we just witnessed the past weeks.
I believe the volatility will be in the form of an Inverse Head and Shoulder (bullish) or Right-angled and Descending Broadening Wedge (bullish) going into the October meeting.
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