If not for Twitter's (TWTR) blow-out quarter and 30% rise in Tuesday's after-hours trading, I suspect Wednesday's gross domestic product report and Federal Open Market Committee (FOMC) announcement would be getting a bit more coverage.
Don't get me wrong. I think we're all curious to see if Twitter can pull a move similar to what Facebook (FB) did in July of 2013, when the company reported a stellar quarter and the stock immediately went from public enemy No. 1 to the must-own name for every momentum investor. However, I believe it's far more important to keep in mind that a minor rewording of the FOMC's boilerplate, easy-money policy statement could quickly trigger a slide in the E-mini S&P 500 futures (Es) back down toward 1850. Yes, that's 1850, not 1950.
By now I assume everyone is aware of the carnage in the homebuilding sector. Stocks such as D.R. Horton (DHI), Hovnanian (HOV), Meritage (MTH) and Ryland Group (RYL) have seen their market capitalization levels shrink by as much as 13% over the past week. Let's face it: If the recent housing data are accurate, we really don't want to be speculating too aggressively on the long side in this sector. I'll stick to my view from the July 25 Trader Daily and simply avoid the homebuilders altogether.
Another sector ETF that has come under increasing pressure over the past week is the Industrial Select Sector SPDR Fund (XLI). The selling in this group might not be getting the same media coverage as the homebuilders but, I assure you, it's been bloody.
Big-name components of the XLI, such as Eaton (ETN), Precision Castparts (PCP), Cummins (CMI), Boeing (BA) and Textron (TXT), have been slaughtered over the past week. Each of the aforementioned stocks have declined between 5% and 10% over the past five trading sessions. What's worse is that Eaton, Precision Castparts and Boeing have each fallen through their respective 200-day simple moving averages, and Cummins and Textron aren't far behind. For the broad market to continuing rising, we simply can't afford to lose the support of entire sectors. In my view, the XLI is teetering dangerously close to becoming a sell on future rallies.
Now that I've painted myself with a blood-red bearish brush, I'll slide into my day-trading armor and suggest that Wednesday's Es auction could go in either direction. The bottom line is that, while we don't know how the FOMC statement will read, nor how traders will ultimately react, we know a sustained trade above 1977.50 -- 1980 will likely lead to new life-of-contract highs. A close beneath the mid-1940s, moreover, will send the bears into overdrive.
Wednesday's trade plan for the Es will revolve around 1968.75 -- 1969.75. All trading above that area would give the bulls a second chance at breaking through 1977.50 and shifting value higher. Everything beneath 1968.75, meanwhile, would keep the pressure on dip buyers and encourage sellers to push their way through 1959.50.
Any downside extension beyond 1959.50 would have the potential to gain steam in a hurry, so caution is advised on the part of dip buyers. In my view, a sustained trade beneath 1959.50 would give the bears a tailwind and likely result in a continued decline toward 1955 and 1946/1945.