The day is finally here. Later this afternoon, the Federal Reserve will announce its first rate hike in quite some time.
Investors have been fearful of a rate hike for several months now, part of the reason why U.S. stocks have been plunging in 2022.
So far, stocks are rallying ahead of the event. The S&P 500 is up 1.6% on the day, while the Nasdaq Composite is up 2.6%. That follows yesterday’s rallies of 2.1% and 2.9%, respectively.
Despite investors’ gut feeling, stocks can and dorally in a rising rate environment. At least historically that is the case.
The concern now is that the market is using up all of its buying power — is it just a short-covering rally ahead of the Fed? — ahead of the event. Let’s look at the key levels.
Trading the S&P 500
I have been adamant that we may see a decline in the days and weeks leading up to the Fed event and a rally after. We’ll see if that pans out despite an early start to the rally this week.
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How the market trades for the rest of this week will be telling in whether we get a sustainable rebound or simply a sell-the-news event and continuation lower.
On the daily chart above, note how the SPY is struggling with the 61.8% retracement of the current range, although it is trying to push above it and the 21-day moving average. If it can continue higher, the SPY faces the daily VWAP measure and the 10-week moving average between $436 to $438.
Above $440 and the 200-day and 50-day moving averages are in play, the latter of which has been resistance for many stocks that have seen short-term rallies.
On the downside, a break of the $425 to $426 area and failure to reclaim this zone opens the door back down to the $415 level, which comes into play near this month’s low.
Trading the Nasdaq
In any regard, note how it’s being repelled of the declining 21-day moving average — which has been active resistance — as well as the 61.8% retracement.
On a sustained push above these measures, it opens the door to the $345 to $347.50 area, where the QQQ finds the VWAP measure from the January low and the declining 10-week moving average.
Above that puts the fourth-quarter low and 50-day moving averages in play.
On the downside, a gap-fill to $329 is possible without ruining the rally. However, if shares lose $326, then the $318 to $320 area is back in play. The QQQ has done an excellent job carving out support near this zone, but if it breaks, more selling could ensue.