- All eyes on the Fed
- Big macro risks call for caution long-term
- S&P 500 is stuck between key levels
The S&P 500 wiped out several days of losses with yet another big move-up in response to another lower-than-expected inflation reading on Tuesday. Yet, it closed well off the highs and held below the key 4100 resistance level ahead of the Federal Reserve meeting today, arguably the last important macro event of the year. What happens today could set the tone for the remainder of the year.
Technically, progress is yet to be made regarding a major breakout. As you can see from the chart of the S&P 500 futures below, the index remains below the long-term bearish trend line and 200-day average, where it has held over the past month or so.
Investors have struggled to commit to a particular direction. But could that indecisiveness end today?
The key risk today is that if the Fed turns out to be more hawkish than the market pricing of the terminal interest rate. If the FOMC projects a terminal rate above 5%, for example, this would be deemed hawkish as the current expectations are that the peak will be below 5%.
At their September meeting, Fed officials projected rates to reach 4.6% by the end of next year. But since then, several officials have spoken in favor of a higher terminal rate due to a strong labor market and risks that inflation could remain above the target for longer, even if price pressures have eased more than expected in recent months.
As traders, it is important not to get too caught up in what the Fed might or might not say and do. What’s more important than the news itself is the reaction to the news, as that could determine how things might pan out for the days and possibly weeks to come.
The S&P 500 is still in muddy waters. The long-term bearish trend line hasn’t been broken, with the 200-day also offering resistance. Yet, key support around 3915 has held firm so far, where we also have the bullish trend line converging.
So, a closing break below 3915 would be bearish, while a daily close above 4100 would further reduce the appeal of the S&P 500 for the bears. Conservative traders may therefore wish to wait for this consolidation to resolve and the Fed-induced volatility to subside before potentially trading in the direction of the break.
Beyond the Fed, concerns about an economic slowdown may keep risk appetite low going forward. Global economic activity is likely to slow down further in the next few months. And with consumers hurt so badly by inflation, you would think that company sales and profits might suffer this holiday.
All told, while the current trend might be bullish, there is a big risk that we could see an end to that trend – especially if the Fed turns out to be more hawkish than the markets expected. So, if you do see any key technical reversal signs emerge on the indices in the next day or two, then be prepared to act accordingly.
Disclosure: The author does not own any of the securities mentioned in this article.