After the Fed delivered a more hawkish than expected stance, the market sold off pretty heavily. The Fed once again had to repeat to the market that they are solely focused on bringing inflation back to their 2% target and they are ready to go above market expectations and risk an overtightening to achieve that.
They also complained once again about the “extremely tight labour market” in a hint that they want to see unemployment picking up before having some confidence in loosening their hawkish stance.
The risk now is that once unemployment starts to rise, the domino effect will take hold and the “mild recession” that the economists expect will turn into an ugly one.
More recently, the China reopening may add to inflationary pressures in the short-term and increase the probabilities of the Fed going even higher than their projected terminal rate of 5.1%. For all of the above reasons the fundamental outlook is skewed to the downside and the bear market might have more legs before finding a bottom.
S&P500 Technical Analysis
On the technical side, as you can see in the chart above, after the sell off out of the FOMC meeting and the break of the strong support area in the 3920-3940 region, the price went into consolidation as the lower volume of the holidays and a lack of notable catalysts provided a rangebound price action.
The consolidation is depicted by the symmetrical triangle pattern. The price may breakout of the triangle and offer 2 different scenarios:
1) Run to the upside and break the 3920-3940 resistance zone, with the big blue downward trendline as a possible ultimate target.
2) Run to the 3920-3940 resistance zone and get rejected, resuming the downward trend and ultimately target the October low at 3506.
Zooming out to the daily chart, we can see how the big blue downward trendline provided support to the bear market. The price couldn’t break it even after the 2nd consecutive miss in the CPI report and got ultimately smacked down by the more hawkish than expected FOMC event.
The risk defining levels are clearly the blue trendline, the 3920-3940 resistance zone and the October low at 3506. Given the bearish outlook the price is more likely to head downwards, but if that wasn’t the case and the price managed to break the trendline, then the 4300 swing level would be eyed.
