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If the Fed tapers, here’s how far stocks will drop

Pete Marovich | Bloomberg | Getty Images

Get excited, because one of the most highly anticipated events for the market is finally here. On Wednesday, the Federal Reserve will finally answer the question that has long consumed the thoughts of investors worldwide: Will the Fed announce a tapering of its quantitative easing program in September?

Whether it announces a large taper, a small taper or no taper at all, the Fed's decision will have a tremendous impact on how the S&P 500 trades (and the S&P e-mini futures alongside it). So, keeping in mind that most analysts and traders believe that a taper in the range of $5 billion to $15 billion is priced in, let's analyze how the market will respond to four possible scenarios.

(Read more: Whatever the Fed does, gold will rally: Schiff)

A slightly bigger taper, in the ballpark of $15 billion to $20 billion, would cause a short-term correction. In this case, the S&P September e-mini futures would likely fall to major support at 1,681.

A taper of more than $20 billion would be a surprise. Overall, I remain bullish on equities, and think this would be seen as a positive move for the health of the market. But if the Fed does announce a big taper, I would wait for the dust to settle before buying. We would be likely to see a consolidation over a few trading days that would bring the market down to support at 1,666.

On the other end of the spectrum, a taper in the ballpark of $5 billion to $10 billion would lead to an overall positive reaction in the equity market, despite any knee-jerk reaction lower.

And if the Fed altogether fails to taper its $85 billion-a-month program, then we expect new highs above 1,711, which would likely send the S&P on its way to our long-term target of 1,757 by year-end.

(Read more: Markets priced in taper lite, but what if we get taper zero?)

That being said, I believe that a failure to taper would not be a healthy thing for this market in the long run.

Rich Ilczyszyn is founder and CEO of iiTrader. Follow him on Twitter @iiTrader.

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