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The Fed Meeting Next Week Will Be Fun (Profitable)


Hey There Income Hunter,


Market action this week was Jerome Powell’s worst nightmare.


The graph below illustrates that the only sector up on the week was oil, and higher energy prices are the last thing J-Pow wants right now.



Well, I guess there is another sector that has been haunting him, too – precious metals.


Silver was up 6% and gold was up 1.5%, while the S&P 500 was down 3.78%.


This week’s action was indicative of higher inflation and slowing growth, which is a disaster in the making for the Fed.


Think about this …


The Q4 2021 GDP estimate is 7%. The forecast for GDP in Q1 2022 is 2%.


Can you imagine the backlash if the Fed tightens into an economy that is tanking?

Today, I’ll show you what matters for next week on the charts as or next week as J-Pow preps for a crunch Q&A following next week’s meeting.


Walking A Tightrope


Powell will have no choice but to walk back the four  hikes that are on the table for 2020.


The economic data, plus the tightening that inflation is inflicting on the economy, simply do not support them


Even President Biden is starting to walk it back. He was talking this week about how difficult it is to generate economic growth because of COVID.


The chatter now is he may be prodding the Fed to help the economy. 


So, I guess the President has had a change of heart after pounding the table that the administration needs to find a way to reduce inflation. Wait until he sees what removing the tightening does to inflation. Wow, this is really turning into a mess.


The NASDAQ index is now down almost 14% from the all-time high, and without any dovish talk out of Powell it may drop a lot further. 


Notice in the chart below that NDX is oversold. so any hint of less than four tightenings or adjustments due to data could trigger a nice short covering rally. 



Charting S&P 500


The chart below illustrates the SPX rallies that have occurred every time the differential between implied volatility and actual vol reaches the 8-10% range – which was hit at the market close on Friday.


In the past the Fed would time their tweaks in policy for when the market was out of balance, meaning it was  oversold like it is now to get maximum benefit.


This would be one of those times.


Powell owes the administration one for the reappointment so the probability does favor a slightly dovish response. 


Lastly, I think bond ETF option vertical spreads or outright calls are the best play heading into next week.


Here is why …


If he triples down (since he doubled down at the last meeting), then stocks continue to meltdown and bonds will rally as they anticipate worse economic data.. 


iShares 7-10year Treasury Bond ETF (Ticker: IEF)


IEF is a deeply liquid bond ETF that is down 10% from the all-time high it hit when COVID began.


I like IEF in this spot because, if Powell does hint at being flexible if data comes in soft, then this ETF could scream higher.



I put the Power Income Trader members into this trade last week …


So far, it is up 28% as bonds started to recover this week and investors began to anticipate the economic slowdown and a rise in bond prices. 


It has been a nice couple of weeks as two other trades I gave out at the last Power Income Trader live event were closed for 30% and 44% gains. 


There will be many more great trades to come as market volatility remains high with so much uncertainty around the Fed. 


>> I’ll share some exclusively when I go live at 3 p.m. on Jan. 26 following the FOMC meeting. << 


This is when Power Income Trader shines because I called the Feds bluff when it was pounding the table on “transitory” inflation and went on tear with long energy and miners.


Now, I am calling their bluff on all this tightening and and have done well so far in 2022.


And the best is yet to come.


Have a great week and as always ….


Live and Trade With Passion My Friend,


Griff

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