As expected the Fed raised rates by 50 basis points and they did not candy coat the statement.
PRE-OPEN MARKET COMMENTS Thursday – Yesterday the Fed raised rates by 50 basis points and the FOMC statement was largely in line with expectations. The S&P 500 closed 50 points lower from the time of the release, but there was no follow through. The ECB followed suit and they raised rates by 50 basis points this morning (from 1.5% to 2%). Sellers are in control and this is a triple witch. That means we can expect volatility the next two days. The S&P 500 is down 55 points before the open and we are within striking distance of the 100-day MA.
The Fed target rate was a little higher than expected (hawkish) and they did not whisper “sweet nothings” to instill confidence. They are going to tame inflation even if it sends the economy into a recession.
There was some economic news that came out overnight. China’s industrial production fell 2.2% and retail sales fell 5.9%. These are big drops and they are in part due to the Covid-19 shut downs. In the US, retail sales fell .6%, Empire Manufacturing was down 11.2% and the Philly Fed was down 13.8.
Weak economic releases and central bank tightening are a bearish combination. I believe that weak economic data points are coming and the inverted yield curve tells us that institutions are expecting it. When those numbers start coming in soft, “The Street” will fear that the Fed has gone too far.
Longer term swing traders should stay sidelined. The reaction to the rate hikes needs to run its course.
Day traders we might have some action today. The 100-day MA will be tested. This is a fairly big overnight drop and it follows the long red candle from Tuesday. That gap higher after the CPI tested the downward sloping D1 trendline and the rejection from that resistance produced a gap reversal that pushed the SPY below the 200-day MA. Our best case scenario is a wimpy bounce with mixed overlapping candles that stalls before half of the gap is filled. That would give us a good entry point for shorts. Our most difficult scenario would be a “gap and go” down to the 100-day MA where we compress the rest of the day. If we test the 100-day MA with ease and if the market can’t get off the deck, we might breach that level in the middle of the day. We won’t know until we see the price action. Year-end strength and triple witching will play a role in the action today. Go with the flow. I will post comments during the day to guide you.
Support is at the 100-day MA and resistance is at the 200-day MA.