Part of the recent run-up in stock market price is likely due to speculation that the Fed will increase its asset purchase program by an additional $45 billion to compensate for the termination of Operation Twist at the end of the year. Operation Twist will not be extended because the Fed is running low on short-term securities to sell. So to continue to buy longer term maturities in the same capacity, the Fed will need to do so through additional quantitative easing.
This will bring total outright purchases by the Fed to $85 billion/month. This is an additional $45 billion on top the current open-ended purchases of $40 billion (from QE3 announced 10/24). Anything less than this will be perceived as a disappointment and the market will likely sell-off as a result. Expect volatility following the announcement at 12:30pm EST as well as Bernanke's press conference later in the afternoon at 2:15pm EST.
The Fed could add $2.2 trillion or more to its balance sheet over the next two years. This will continue to keep interest rates low and to maintain an artificial level of support underneath the financial markets looking forward.
Without surprise monetary easing measures by the Fed, or something larger than an additional $45 billion/month in asset purchases, I expect markets to sell off following the Announcement. If we do get the sell-off, it will setup a nice buying opportunity next week. We really haven't seen any selling in this market since the ES E-mini S&P 500 Futures bottomed at 1340.25 on November 16th. This market is due for a little bit of fear before the end of the year, it is due for at least a small pullback. That pullback, if we get it, will create the first good dip-buying opportunity since mid-November to position yourself long into the end of the year.
Some levels to watch on the ES (Z December Contract):
Resistance above at 1435-1436, 1439-1440, 1450-1451, 1455-1456
Support below at 1419-1420, 1411-1412, 1401-1402
