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Neutral Market after another Fed rate hike

The Fed announced another quarter-point rate hike taking the Fed Funds target rate to 4.75-5.0% after the two-day FOMC meeting. It is the ninth increase in the past year as policymakers were unanimous about raising interest rates by a quarter point.


Investors widely anticipated the 25-basis point rate hike given the banking turmoil in recent weeks. The central bank still expects interest rates to climb to 5.1% by year-end, suggesting another quarter-point increase.


Investors struggle to understand how Chairman Powell and the Fed can contain inflation and avoid an economic slowdown due to tightening financial conditions and uncertainties in the banking system.


Although the Fed suggests that the rate increase in the federal funds rate could end soon and the banking system is sound and resilient, the stock market’s poor response to the central bank’s statement suggests investors remain concerned about the banking turmoil, inflation, and recession.


On the charts, several patterns signal investors are confused with the near-to-intermediate-term directions of the stock market. Three specific patterns in the SPX Index show frustrations between the bulls and the bears.


A descending broadening wedge from Feb 2023 gives the bulls hope this is a market bottom. The bottom of the wedge is 3,740 or just below the 61.8% retracement (3,760.45) from Oct 2022-Feb 2023 rally. The ability to surge above the top wedge (4,044) and 3/6/23 high (4,078.49) confirms a breakout and signals the next rally to 4,195.44 (2/2/23 high). However, failure to breakout above the top of the wedge coupled with a negative outside day (3/22/23) also warns of another market decline toward 3,740-3,760.5.


Two head and shoulders tops continue to warn of further selling pressures. The smaller Jan 2023 head/shoulders top breakdown below 3,885.54-3,928.16 on 3/9/23 still suggests a 309.90-points decline to a downside SPX target at 3,576-3,618. A convincing move above 4,078.49 (right shoulder) would help to negate the short-term distribution top, leading to a retest of 4,195.44 (2/2/23 high or the head).


The larger head and shoulders top pattern from Nov 2022 warns of a deeper and more extensive market selloff. Neckline support is 3,764.49-3,808.86 (1/19 and 3/2/23 lows). Violation of neckline support suggests a 451.22-point decline to 3,313-3,358. To negate the distribution top, SPX must clear above the left and right shoulders (4,015/4,100.5-4,101 and 4,078.5) and preferably above 4,195.44. A breakout renders the next sustainable SPX rally toward 4,646.5.


In summary, the Fed raised rates by 25 basis points. Although the decision was unanimous and widely expected, the stock market responded poorly, evidenced by strong selling into the close. S&P 500 Index (SPX) finished the day down 1.65%, Dow Jones Industrial Average (INDU) also declined 1.63%, and Nasdaq Composite Index (COMPQ) slipped 1.60%.


The market struggles as long as the three different patterns remain unresolved. Two patterns are bearish distribution top formations (Nov 2022 and Jan 2023 head and shoulders tops). The third is a bullish descending broadening wedge pattern. Upon further review of several popular technical indicators, including SPX/WLSH relative strength, Advance-Decline market breadth, MACD price momentum, RSI indicator, and ADX/+DI and -DI, they show mixed readings.


With the SPX trading at 3,936.97 (3/22/23), potential downside risks at 3,300-3,600, and upside potentials at 4,550-4,650, it would imply a neutral market where the bulls and bears remain deadlocked.


Source: Charts courtesy of StockCharts.com

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