Federal Reserve Chair Powell testified before Congress on the economy today. Chairman Powell stated the Fed is likely to support a quarter-point interest-rate hike at the March FOMC meeting rather than the half-point rate hike that some policymakers have proposed.
The stock market promptly rallied on the backdrop of Powell’s testimony. However, the escalating crisis in Ukraine remains fluid. The war can still impact the U.S. and global economy, at least from a near-to-medium term basis. On top of the geopolitical crisis, investors continue to fear rising inflation. The spike in energy and commodity prices from the effects of the Russia/Ukraine war can exacerbate the current high inflation. The financial sanctions against Russia can also lead to more global financial instabilities.
The primary objective of the central bank is to create another soft landing. However, it needs to be extra careful. Too tight of constraints can push the economy into a recession. Too loose can also lead to hyper-inflation. Stagflation or nominal economic growth and rising inflation is also a distinct possibility if the Fed makes a mistake. The challenges the Fed faces will create a volatile and choppy trading environment in the weeks and months ahead. The outcome of either a hard or soft landing will impact the directional trend of U.S. stocks.
Technically speaking, the market actions over the past two months have whipsawed traders and investors. A new downtrend channel has developed in the S&P 500 Index, suggesting the market psychology has changed from buying on dips to selling on rallies and hence the lower-highs and lower-lows. For the second time in recent weeks, S&P 500 Index (SPX) has generated another oversold rally. The question is whether this is just another technical bounce within the downtrend or a sustainable bottom?
The technical bounce from the 2/24/22 low (4,114.65) is approaching key initial resistance at 4,383.5-4,401.48 (3/2/22 intraday high and the 38.2% retracement from 1/4/22 to 2/24/22 decline). The 38.2% retracement is typically the first test of crucial resistance after a sharp market decline. The ability of SPX to clear this resistance can extend the rally toward secondary resistance at 4,464-4,495 (200-day ma, Jan 2022 downtrend, 50% retracement, 12/3/21 low, Jan 2022 breakdown, and the 2/16/22 high). The convergences of so many technical levels hint at another inflection point.
A breakout here can entice traders to return, allowing for the next SPX rally to 4,531-4,595 (9/2/21, 2/2 and 2/9/22 highs, 12/20/21 and 1/10/22 lows, 50-day ma, and the 61.8% retracement). Since the 61.8% retracement, top of the Jan 2022 downtrend channel, and the 50-day ma are converging, it is imperative the SPX Index surge convincingly above this critical resistance. A breakout here negates the lower-high pattern and reverses the two-month downtrend channel. Most importantly, it will convince investors that this is more than an oversold rally, resulting in the next SPX rally to 4,714.5-4,749 (Nov 2021, 12/16/21, and 1/12/22 highs), and above this to 4,818.62 (1/4/22 all-time high). A new record high reaffirms the resumption of the primary uptrend.
Because the near-to-medium term trend remains in a downtrend as evidenced by the 2-month downtrend channel and the SPX Index trading below its 50-day and 200-day moving averages, there are risks. Initial support rises to 4,279-4,306 (Sept/Oct 2021, 1/28, and 3/1/22 lows). Violation here opens the door for a retest of secondary support at 4,222.62 (1/24/22 prior lower-low), and below this 4,114.65 (2/24/22 reaction low). Violation of this pivotal low coupled with a breakdown below the bottom of its downtrend channel (4,030) will trigger the next SPX selloff.
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