Last Wednesday, I pointed out a bearish price pattern in the S&P 500.
I warned that if the index were to break below the support line of that price pattern, we’d likely be looking at a selloff back to around 4306, the lows from October 2021.
We did indeed break below that important support line. And in Monday’s trading session, the S&P 500 fell as low as 4222 on an intra-day trading basis.
But, the sale of risk-on assets hasn’t been limited to the S&P 500…
The Nasdaq sold off as much as 12% since last week, and the crypto markets suffered a staggering $1 trillion loss with bitcoin dipping to prices not seen since July.
The market is rattled. That much is clear.
And now, all eyes are on the Fed as it prepares to release an updated statement today at 2 p.m. ET.
It seems like the market is waiting on the Fed to provide some clear direction in the face of the persisting inflationary challenges.
But I don’t think it’s that straightforward.
And technical analysis can really shine in situations like this.
For example, in last Wednesday’s essay we were able to identify the key support level in the S&P 500. The market poked beyond that level of 4306 by a relatively modest 84 points before it stabilized.
Regardless of what the Fed says, the technicals tell me that this market is oversold and is more likely to bounce than to continue crashing down – at least in the short term.
Here’s an updated daily chart of the S&P 500. This time, I’ve included two technical indicators, Bollinger Bands and the Relative Strength Index (RSI)…
Bollinger Bands are a great indicator to measure a market’s likely trading range.
Meaning if prices trade outside the upper or lower blue bands, it’s a signal that the market is overextended and is more likely to snap back, often to the midline of the Bollinger Bands (blue dotted line).
The last time this happened was on December 1, and the market bounced back quite quickly.
This time, though, the break below the lower band is even more extreme. And as Sir Isaac Newton would say, “every action has an equal and opposite reaction.”
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In the lower half of the chart is the RSI, which measures momentum. Currently, it’s flashing an extremely oversold signal (blue circle – below 30%).
When you take these two clues and piece them together, it sets the stage for a classic “buy the rumor, sell the news” scenario later this afternoon.
Except in this situation, the market sold off on the rumor… and I think it’s likely to buy back in on the actual news.
Investors are worried about inflation, and since the start of the year, have been pricing in what they think will be a more hawkish turn by the Fed…
This is what I mean by selling the rumor.
Now for the second half of the equation: buying the news… When the Fed delivers their updated guidance, the market could realize that they overreacted and that stocks should indeed be priced higher.
Of course, we’ll just have to wait and see how the market will react later today.
But don’t be surprised if we get a fierce rally… even if on the surface it would make more sense for the market to sell off based on the actual news.
Happy trading,
Imre Gams
Analyst, Market Minute
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