Yesterday, the FED hiked interest rates by 25 basis points, causing an initial rally in the U.S. stock market, followed by a selloff after FOMC’s press release. In his speech, Jerome Powell acknowledged the persistence of high inflation (replacing the tone of “easing inflation”), banking sector problems, and a strong labor market. Furthermore, he reiterated FED’s commitment to bringing the inflation rate back to 2%, adding that “some additional policy firming” may be required to achieve this goal (translating to the possibility of more rate hikes).
As for projection materials, the median forecast for the unemployment rate in 2023 is 4.5% (and 4.6% in 2024). We discussed a few months ago that historically, each 1% increase in the unemployment rate was always accompanied by a recession. Therefore, considering that the unemployment rate was 3.4% in January 2023, we could argue that the FED implies a recession over the course of the current year (even though it has been implying it at least since September 2022 through its forecasts).
In addition to that, the FED’s documents show a median forecast for FED’s fund rate at 5.1% in 2023, which is higher than the current target range of 4.75% to 5% (telling us that interest rates should be higher at some point). In our opinion, this means only more stress for the already weak U.S. economy. Due to that, we will stick to our previous assessment of more downside for the stock market in the coming months. Accordingly, we maintain our price target for SPX at $3 400.
Illustration 1.01 Illustration 1.01 displays the 5-minute chart of ES1! continuous futures. Yellow arrows indicate particular events in the market. Vicious whipsaws in the price can be observed.
Technical analysis Daily time frame = Bearish (Weak trend) Weekly time frame = Neutral
Illustration 1.02 Illustration 1.02 shows the daily chart of SPX and the bullish breakout, followed by invalidation after Jerome Powell’s speech. We will pay close attention to today’s price action in SPX. To confirm a bearish bias, we would like to see the price stay below the sloping resistance (ideally, manifesting more weakness).
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
don't forgot the point about interest rates staying high for 2023. people were hoping for an easing of interest rates soon
Tradersweekly
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@simplejoe1, You are right. Thank you for the comment.
RobBiddle
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At least one more hike. More if the banking issues don't lead to sufficient tightening. Powell said they think it's possible the banking issues will lead to tightening equivalent to a rate hike. I'm not sure what data they'll be watching to determine that, but if things don't tighten up on their own then the FED will keep raising rates. Either way it sounds bearish. Also Powell reiterated that there will be no cuts in 2023.
Tradersweekly
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@RobBiddle, I completely agree with you that it is bearish, rather than bullish.
KlejdiCuni
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Very good trading plan. Thanks for sharing with us.
@KlejdiCuni I thought this was the most important piece from yesterday. No cuts. I thought the market was pricing in cuts for 2023. I don’t understand current price action.
KlejdiCuni
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@Petrichor_, They may cut later during the year if the indicators will improve again. We have seen FED and other Central Banks to change their speech and decision several time during each meeting.
Petrichor_
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@KlejdiCuni, Sure, and price action will reflect it when that happens. Probably from a much lower level.
UnknownUnicorn15614419
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I would add the state of macro parameters to the technical analysis, but other than that, it's a great chart. Thank you!