Market Will Rally After the FOMC Wed – Here’s Why

March 19, 2018
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - The market retraced last week and it is testing support at the 50-day moving average. Investors are worried that the Fed will hike four times this year and they will be looking for clues during the FOMC statement on Wednesday. I believe the comments will be dovish and the market will rebound. Wage inflation is the greatest concern and it only increased .1% last month when the Unemployment Report was released. This is the largest input cost for producers and they have to raise prices to maintain margins. Workers have more money and increased demand can also put upward pressure on prices. The January spike in wages was due to tax cut raises and bonuses. That temporary event has run its course. Price inflation is measured by CPI, PPI and PCE. Across all fronts it has been tame and that will continue. Oil has the largest influence on price inflation and it has been drifting lower. The Fed said that it is not going to accelerate tightening just because the 2% inflation target was reached. This is the first time in over a decade that it has ticked this high and Fed officials don't want to overreact. Given the moderate inflation backdrop I believe the Fed has breathing room - the statement will be relatively dovish. The new chairman (Powell) does not want to rattle the market early in his tenure. It is also common for the FOMC tone to be tame after a rate hike. We are likely to see a .25% increase this Wednesday. Inflation is important to watch and it sparked the market decline in February. Earnings are great and global economic conditions are strong. The market got a little ahead of itself and it needed to retrace. Bullish speculators have been flushed out and support will be established this week. Swing traders should use the 50-day moving average as a stop on a closing basis (SPY 274.54). We might get stopped out today, but we will re-enter when the next leg of the rally begins. Day traders should let the market come in this morning. Wait for support and use the 50-day moving average as your guide. If we are below it, favor the short side. If we are above it, favor the long side. I believe support will be established today and we will see quiet trading ahead of the FOMC statement Wednesday. After the release I'm expecting a market rally. . . image

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