Fed Has Spoken – Traders, Indices On Edge

Traders are leaning forward and sitting upright in their trading chairs, looking for safe trades in the midst of volatility after the midweek Federal Reserve announcement of monetary policy.

The Fed response to inflation sent waves of uncertainty throughout the stock market. 

Supply and demand imbalances, a surging economy, and lagging labor participation contributed to the Fed determination to maintain its plans to raise interest rates. The market took the time to hold a compression relief rally soon afterward on Wednesday before the selling overtook the market into the close.

Plans for interest rate increases by the Central Bank pushed the stock market into a shaky environment. All three indexes were again in the red after the close today. 

The Nasdaq has experienced the steepest decline since March 2020. With the wind no longer at its back, Simpler’s traders are watchful for a reversion to the mean price in the technology-laden index.

The decline in the S&P 500 has not been as steep due to its inclusion of finance and energy. But, it has experienced a loss of momentum on its monthly chart.

The Dow seems confused, rallying one hour and sliding back the next. The see-saw cycle has traders unnerved.

The market has exhausted loads of energy adjusting to Fed announcements. This has Simpler’s traders not anticipating any new highs of note in the first half of this year. While the market may rip back up, it could just as easily fall back to broken-down support.

Where do Simpler’s traders find potential trading opportunities in this environment?

The upcoming weeks have them watching for squeezes on the daily and monthly charts in tangible currencies. Concurrently, semiconductors and oil are at the leading edge of the market right now, holding up better than the indexes in terms of structure.

By contrast, meme stocks and pandemic-friendly stocks may never recover. The momentum is down with excess speculation unraveling opportunities in these favorites.

Based on historical reviews, our traders are expecting a possible rally in the first part of February. However, Simpler’s traders recognize that in late February and March the market could reach new lows. Ultimately these lows could result in good buying opportunities after the market settles down.

Working through this market chop, Simpler’s traders are not aggressively swing trading any stocks below the 200 simple moving average. Prices at this level indicate the institutions have sold them off – and they likely won’t rally back without institutional support.

There are still possibilities in the daily time frame of the S&P 500 and the Nasdaq indexes. The market has the potential of a rally to close the week if the charts shape up nicely. This could open up opportunities for bearish exposure on the two indices.

Traders will do well to remember to keep trade positions small as market influences could change the environment quickly.