Nine Points From the Line That Matters

The S&P 500 closed last week at 7,650. That is down six points. On the surface, nothing happened.

Underneath, a great deal happened. On Wednesday, the day the Federal Reserve raised interest rates for the first time in three years, the market fell to 7,508. That is nine points above 7,498, the level this letter has called the line that decides the bigger trend. It did not touch it. It closed forty four points off the low and rallied one hundred and forty three points over the next two days.

So the week ended flat, and the most important level on the chart got tested to within a tenth of one percent and held. Those two facts belong together, and they set up everything about the week ahead.

The Downside Call Was Right. The Ceiling Was Never Tested.

Last issue named two scenarios. Scenario B said a hawkish Fed message would push the 10 year Treasury yield through 5 percent and close the market below 7,580, opening 7,550 and then 7,498. That is exactly what happened, in that order, on the day it was supposed to happen. The 10 year closed at 5.006 percent on Wednesday. The market closed at 7,552 the same day, having traded to 7,508. Both named downside levels were reached.

Scenario A did not happen, and the ceiling call went untested. We said 7,687 was an unusually precise wall where several measures agreed. The market never got near it. The high for the week was 7,657, thirty points short. A level you never reach tells you nothing, so that call carries forward rather than being scored.

Two smaller calls were close but not clean. On gold we said the flush to 4,293 looked like a short term low. The actual low came one session later and twenty points lower at 4,273. After that, gold cleared both resistance levels we named, 4,383 to 4,386 and 4,408 to 4,412, and reached 4,440. Right idea, one session early. On the euro we said the next support zone was 1.1508 to 1.1530. The euro went straight through it to 1.1459. Direction right, target too shallow.

The Fed Did Not Buy Itself a Pause

The Federal Reserve raised its target rate by a quarter point to a range of 3.75 to 4.00 percent. The vote was 12 to 0. It is the first increase since July 2023.

The hike was expected. The message was not. Along with the decision, Fed officials published their own forecasts, and sixteen of the eighteen expect at least one more increase before the end of the year. There are only two meetings left. That is a sequence, not a single move.

The data that week backed them up. Retail sales for August rose 1.2 percent against a forecast near 0.8 percent. Weekly claims for unemployment benefits came in at 207,000, which is low. Consumers are still spending and people are still working. Nothing in that argues for stopping.

Then the strange part. The market got the more aggressive of the two possible outcomes, and the Nasdaq finished the week up 0.7 percent. The bond market explains why. The 5 year yield rose about 7 basis points on the week. The 10 year rose about 2. The 30 year actually fell. Short term rates went up and long term rates went down. That is what it looks like when investors believe the central bank will succeed: borrowing costs more now because the Fed is tightening, and less later because inflation is expected to come under control. Compare that to the week before, when every part of the curve sold off together. This was the friendliest way for stocks to absorb a rate increase.

Not everything was friendly. The Dow fell 1.7 percent, its third losing week in a row, and is now about 4 percent below its August high. Money moved into a handful of large technology companies and out of everything else. A market that only rises in its biggest names is a narrower market than the index makes it look.

The Market Is Boxed In, and It Closed in the Middle

For the first time in months there is now a defined level on both sides of this market.

Below, 7,498 remains the line that would confirm the larger uptrend has broken. It did not move last week, which is the third week running it has stayed put. Wednesday took the market to nine points above it and it held. That is the closest approach all year, and the level passed its hardest test so far.

Above, there is something new. 7,760 is now the level that would confirm the recent low was a real bottom rather than a pause. Until last week there was a clear number for where the decline gets confirmed and no number at all for where a recovery gets confirmed. That gap is closed. The distance between the two lines is about 3.4 percent, and Friday's close sat almost exactly in the middle of it.

Between those two there is a third number. A close above 7,717 would end the run of lower peaks that has defined this market since the August record. That is a smaller signal than 7,760 and it sits forty two points below it. It is entirely possible for the market to break the pattern of lower peaks without confirming a full recovery, and that gap between 7,717 and 7,760 is where this week is most likely to end up.

On the way up, the ladder is 7,662, then 7,687 to 7,699, then 7,717, then this week's upper boundary at 7,729. Each of those has a cluster of unrelated measures sitting on it. The zone from 7,687 to 7,699 is the densest of them and remains the most likely place a rally stalls.

On the way down, the first floor is 7,617, the average price of the last fifty trading days. That average is flattening out fast, rising less than ten points a week now against sixteen the week before. Below it sits 7,595, the monthly floor, which has now been defended three times. Each defense has required a deeper break than the last, nineteen points above, then fifteen below, then sixty below. A floor that keeps holding but keeps getting pushed further is weakening, not strengthening. Then 7,579 is this week's lower boundary, and 7,508 is Wednesday's low.

Gold is the cleaner chart of the two. It closed Friday at 4,425 after falling to 4,273 on Wednesday and rallying 166 points. That low cut nineteen points through the previous one and then closed back above it within the hour, which is the textbook version of what gold failed to do the week before. The immediate hurdle is 4,429, the long term average price, which is four points away and has not been cleared. Above that, 4,440 and then 4,480, which is where the trend of lower peaks actually breaks. Then 4,514. A close back below 4,381 would put the low back in question.

The euro is at 1.1489 and is the weakest of the three. It made a double bottom at 1.1459 and 1.1460 on Friday and bounced, but it is sitting inside a band of overhead supply between 1.1484 and 1.1534. Two lows a fraction of a pip apart are a magnet, not a floor. A break of them opens 1.1453 and then 1.1421. A close back above 1.1534 would say the decline is done.

The Bypass Is Coming Back, and That Is Not All Good News

The chart is pointing modestly higher in the short run, into a market that still has lower peaks and a weakening floor. Energy is the story that decides whether that short rally extends or fails. Last week it helped. Saudi Arabia moved to restore about half the capacity of its damaged East-West pipeline within days, and the full line in about six weeks. Oil fell hard on the news. Brent went from about $105 to $99 and is back below $100. US crude fell to about $96. Roughly five percentage points of war premium came out of the price in three sessions.

Here is the part that has not been priced. Saudi Arabia told its European refining customers they will receive no crude at all in October. It is pushing roughly 60 million barrels back through the Persian Gulf instead, to buyers in Asia. That does not remove oil from the world. It moves it. And it moves it through the Strait of Hormuz, the exact chokepoint the damaged pipeline existed to avoid. More barrels are now transiting the waterway that has been under attack for six months, at a time when the bypass is offline. A fast repair keeps this quiet and helps both stocks and gold. Another strike while the bypass is down would be a bigger event than last week's was.

An Empty Calendar and Ten Fed Speeches

There is no Federal Reserve meeting this week, no inflation report, and no jobs report. It is the first quiet calendar since the middle of August.

What there is instead is Fed officials talking. The blackout period around the meeting has ended and central bankers make at least ten scheduled appearances. Goolsbee on Monday. Williams, Jefferson and Barkin on Tuesday. Barr on Wednesday. Williams, Barkin, Hammack and Paulson on Thursday. Williams and Hammack again on Friday. Wednesday also brings the first September reading on business activity through the flash surveys, and Friday brings August orders for long lasting goods.

With sixteen of eighteen officials pointing to another increase, what these speakers say about the pace is the only real scheduled risk of the week. If they describe another hike as likely but not urgent, the short term rally has room. If more than one of them talks about moving at consecutive meetings, yields push back toward 5 percent and the floor gets tested instead. There is also something not on any calendar. About a quarter of the entire United States options market expired on Friday in the second largest expiration on record. Large dealers hedge those positions by buying and selling the index, and that activity tends to hold prices in a narrow range as expiration approaches. That pressure is now gone. The first two sessions of this week are the cleanest read on direction the market has offered in a month.

Two Ways This Week Resolves

Scenario A, the one the chart slightly favors. The low at 7,508 holds and the market works higher into the 7,687 to 7,699 zone, the same ceiling that was never tested last week. That rally stalls below 7,717 and the pattern of lower peaks stays intact. This would be a relief rally inside a correction, not a new advance. The larger path still points to a low in the second half of October, so a failure at that ceiling would set up the next leg down rather than end the decline.

Scenario B. Fed speakers talk about consecutive increases, yields push back through 5 percent, and the market closes below 7,610. That opens 7,579, then 7,595 on a third test, then 7,508. A close below 7,498 is the line that says the advance since March is finished, and it would put the long term average price in view, near 7,183 today and rising toward 7,265 by the middle of October.

The honest counterweight to both. Friday opened at the high of the week and closed below its own opening price, and four of the last five weekly highs were made in the first minutes of a session. That is sellers showing up at the bell rather than buyers accumulating. It is the single best argument that Scenario A is a trap.

What to Do With This

1. The box is 7,498 to 7,760. Below the first, the correction is confirmed. Above the second, the recovery is confirmed. Friday closed in the middle, and the middle of a range is the worst place to have an opinion.
2. 7,717 is the near term tell. A close above it ends the run of lower peaks. A close in the gap between 7,717 and 7,760 breaks the price pattern without confirming anything larger, and that is the most likely outcome of a good week.
3. Listen for the word consecutive. Ten Fed speeches and no data. The hike is done. What matters now is whether officials describe the next one as a matter of timing or a matter of pace.
4. Watch the first two sessions. A quarter of the options market rolled off on Friday. The pinning is gone. Monday and Tuesday are the most honest price action of the month.
5. Gold has the better setup. It reversed harder and cleaner than stocks did, and it needs only to clear 4,429 to confirm it. The euro has the worst, sitting on two matching lows that usually get taken.

A final thought. The structure of this market got measurably worse last week. Five lower peaks now instead of four, five lower dips instead of four, and the steps between them are growing rather than shrinking. And yet the index finished flat, technology rose, and the cost of protecting against a fall got cheaper. That combination does not usually last long. The market has given us two numbers that settle the argument. This is a week to wait for one of them rather than guess which it will be.