After the Fed came out as more hawkish than expected, the market sold off as the fear of an overtightening and a deep recession caused a switch to a
After the Fed
came out as more hawkish than expected, the market sold off as the fear
of an overtightening and a deep recession caused a switch to a risk-off sentiment.
The rally we saw in October and
November supported by weak economic data and moderating inflation readings came
to an end as the expectations of a less hawkish Fed were proved wrong.
The Fed bumped up its terminal rate to 5.1% and signalled a “higher for
longer” intention as the Dot
Plot showed a 4.1% rate in 2024 and Fed Chair Powell pushed back against rate
cuts expectations in 2023.
Of course, these are just
forecasts and the Fed has been getting everything wrong for quite some time. These
forecasts are shaped by incoming economic data, and we can expect them to
be revised quite easily once things get really ugly in 2023 and the
unemployment rate starts to pick up.
Although that may change their
strategy, the risks are now skewed to an overtightening and a bad recession,
which are the very worst things for the stock market.
On the technical side as you can
see in the daily chart above, the price couldn’t break the resistance in the 11500-11600 price area and failed for the third and
last time after the miss in the CPI report. The day after we got the more
hawkish than expected FOMC and that pushed the price even lower ultimately
leading to the break of the support in the 10900 area and strong
momentum to the downside.
All else being equal, we can
expect the price to fall at least to the October low at 10096.
On the 1-hour chart above, we can
see how the price has been diverging with the RSI as it tried several times to
break the resistance area. Eventually, buyers gave up and the price collapsed.
The break of the support in the 10900 area gave sellers even more confidence to
push the price lower.
Drilling down to the 15-minutes
chart above, we can see how the price has been trending downwards in a falling channel. The new development though is
that the price has been diverging with the RSI signalling a loss of momentum
and broke the upper band of the channel. This can lead to a short-term
pullback, which generally has the top of the channel as a target.
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