Market Bullish Ahead of the FOMC Announcement

The immediate-term price action is quite bullish and I wouldn't be surprised to see the ES approach or even retest the May highs. In the bigger picture however, I see the market in a topping pattern and that keeps the bearish outlook alive. I do expect to see lower lows as we trade into the summer.

As I write this and the ES trades near 1645, I am more or less neutral. I will be watching the market reaction to the FOMC announcement today (2.00 pm EST) and the press conference with Ben Bernanke (2.30 pm EST).

Expectations:
Fed will not taper. $85 billion in asset purchases will continue.

The catalyst that started the selling back on May 22nd, was the comment by Ben Bernanke who said, "If we see continued improvement and we have confidence that that's going to be sustained, then we could in the next few meetings ... take a step down in our pace of purchases." 

Since this taper comment, Japanese stocks traded down as much as 20%, emerging markets were down 10% and the S&P 500 was down 5%. All this because Bernanke suggested the Fed will create less than $85 billion dollars per month at some point. But lets get real, the Fed is not going to do this any time soon. $85 billion per month in asset purchases will continue and here is why:

• Unemployment rate has not reached Fed target of 6.5%
• Inflation levels remain subdued. 
• The Fed balance sheet is excessive, it has been excessive and it will continue to be excessive. Tapering will not change this.
• The price of Treasury Bonds is approaching important support levels. The Fed does not want to see selling in treasuries continue at this point. Bernanke will make sure this does not happen. This alone guarantees (in my opinion) that the Fed will not taper at this time.
• Industrial and tech companies need to see an economic recovery in the developing world in the 2nd half of the year. Tapering is not the answer and without a recovery in the developing economies, a world wide economic slow down could ensue.

So what does that mean for equities? I really don't think it means much. Continuing to add $85 billion of liquidity into the markets is enough to prevent sellers from reeking havoc on the markets, but it isn't enough to to surge the markets to new highs from here. We have already seen equities bid up ahead of the FOMC announcement, so some of the bullish sentiment that comes along with continued easing, is already priced in. If the Fed does happen to reduce asset purchases (or taper), you can expect heavy selling to commence. Like I said earlier, this is a very unlikely scenario at this time. 

The market remains elevated (ES is up 23% since November 16th of last year) and price action over the past month continues to signify a potential topping pattern. It would take a surprise increase in the level of asset purchases by the Fed to sustain this remarkable bull market without seeing a more significant correction first.

We'll see what kind of language we get from Bernanke. There is still room for the market to move a little higher before more sellers come back into the picture.

Levels to watch on the ES (U - September 2013 Contract):

Resistance above at: 1655-1656, 1659-1660, 1664-1665, 1674-1675

Support below at: 1635-1636, 1629-1630, 1607-1608, 1592-1593.

Looking further ahead, I am expecting a bottom in the 1555-1565 range. But we'll listen to what Ben has to say before getting too ahead of ourselves...