FOMC coming up
Revisited dot-plot and SEP. Be careful.
Quick summary:
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The breakdown below 670 has shifted the structure, with support now turning into resistance. Daily and 4-hour momentum and trend both remain negative.
If 670 continues to reject, the next level to watch sits closer to 650.
Wednesday’s FOMC meeting may drive volatility, but price reaction around 670 remains the key signal.
Charts: losing support
The bounce did not last long.
Price pushed lower last week, breaking below 670, weakening the structure, and turning 670 from support into resistance. Today we danced around it most of the day, closing right at the 670 mark.
On the daily chart (below), the trend is clearly negative, breaking below 100-period MA, with several confirmations to the downside. One could reasonably expect a move down to 650 soon if the structure holds.
As long as price remains below 670, rallies are likely to be sold into rather than building into something sustainable. The FOMC might just be the catalyst that sends price down to the 200-period MA line. For example, if we get a very hawkish message in terms of the Fed expecting to raise rates, then all hell breaks loose. Let’s wait and see.
On the 4-hour chart, we should see a more clear signal of whether 670 stays or breaks. Remember what confirmation looks like. You want to see a move down, a bounce back toward the broken level, and then another rejection. If that sequence develops around 670, downside can accelerate quickly. On the other hand, interesting to see the 5-period cross over the 20-period MA on the 4-hour chart, with MACD histogram positive. This can usually signal a continuous upside move over the next 5-6 periods (2-3 days), suggesting the relief rally could last for a while.
However that too is contingent on the FOMC signal.
No change is widely expected and priced in, but the focus will be on Powell’s comments and whether there is any shift in tone around inflation and the labor market. If rising oil prices are concerning for the Fed in terms of inflation expectations, this will spook markets. If there is a hint that the Fed is thinking about raising rates, that will cause a full-out panic sell. The 200 daily MA is breached and we go below 650.
There are also signs of division within the Fed, with some leaning toward cuts while others remain cautious given persistent price pressures. That makes the reaction to the press conference more important than the decision itself.
At this moment I would hedge to the downside, as the dangers of Powell pulling a hawkish message are too big to ignore and not be protected. Go back to the Iran War Game Theory piece I wrote on Saturday and how to position for it. This is where continued pain may happen, and is a high probability scenario at this point.
Also keep in mind that we get the revised dot-plot and the summary of economic projections. This was the previous one:
Last time we got higher expected GDP growth and lower expected PCE inflation, however no change to projected rate cuts.
When this comes out (tomorrow at 2pm EST), look to interest rate and inflation projections first:
If there is no change in interest rate projections (or even worse, higher expected interest rates), as a consequence of higher expected inflation, expect a big red candle.
If, however, we get unchanged (or even lower) inflation and unemployment expectations, with lower rate expectations, this might push us back to over 6,800 on SPX.
To be honest, I’m leaning towards the first, with a hawkish presser from Powell. Anything other than that - great, happy to see some upside back to the market. But the overwhelming feeling is that this the Fed will not be constructive, that they will “observe the ongoing developments with oil prices and adjust accordingly”.
In other words, back to see whatever happens at the Strait of Hormuz, hoping for a quick resolution of the war. Easier said than done.
The competition
As markets slip below key support, the top position remains intact, while movement beneath it continues to build. With pressure increasing and levels breaking, this week could quickly reshape the standings.
Stay focused and keep climbing the ranks!
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