EB Daily Market Report - Quick Pre-Fed Update - Wednesday, March 20, 2024

The overall market is fairly flat as traders await the Fed announcement at 2pm ET. I wanted to quickly discuss a few things I touched on earlier during our TP Live show and during our Live Trading Room that followed 30 minutes later.

First, the small cap IWM has been the weakest index of late and appears trapped short-term between support at its lower parallel channel trendline and resistance at its now-declining 20-day EMA:

Which breaks first, channel support (lower blue line) or 20-day EMA resistance (red arrows)?

Helping us to make this call is the direction of the 10-year treasury yield ($TNX). Let's take a quick look at the last couple years to see what correlation tells us about the direction of the IWM and the direction of the TNX:

The red-shaded area tells us that the IWM and $TNX have moved mostly in inverse fashion the past couple years. When yields move up, the IWM moves down. And when yields move down, the IWM moves. We now have a key overhead yield resistance in play at 4.35%. Looks like a cup has formed with weakness the past couple days possibly establishing a handle:

Do we see a breakout? If so, it would measure, based on the cup, to roughly 4.65%. Then, based on the upper trendline (from connecting the January and February highs), we'd likely see that 4.65% level reached in April sometime. But what if this pattern falls apart? Well, that'd be more bullish for the IWM, at least based on recent history.

The inverse correlation has been nearly 100% recently. Check this out:

I think it's pretty easy to visualize this inverse correlation the past month. Yields have dropped the past two days and the IWM rebounded. However, the IWM is struggling to clear 202.75-203.00. A close today above 203 with the TNX remaining below 4.35% after FedSpeak would be bullish for the IWM.

I do want to say that this inverse relationship DOES NOT EXIST long-term. I believe that in a normal economic environment, with tame inflation, the TNX moves up or down based solely on economic activity or expected economic activity ahead. The last 2-3 years, though, it's been about INFLATION first and foremost and that's like what the past's positive correlation has morphed into the inverse correlation we've witnessed more recently.

Buckle up! Here comes Fed Chief Powell in about 20 minutes!

Happy trading!

Tom