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March 28, 2024

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FEDERAL RESERVE

Fed raises rates by 25 points, signals rate hikes near end

It is nearly 24 hours since Jerome Powell announced the Federal Reserve is raising interest rates by 25 basis points, and US stock markets continue their roller coaster ride.

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Above is the intraday play by play from yesterday. The Fed hike and press conference saw an initial pop, then a chop fest, before breaking out higher. However, comments from the Treasury Secretary Janet Yellen caused a sell off. When it comes to depositor insurance, there will be no blanket insurance on all deposits. This spooked markets.

And this was the story of yesterday’s Fed press conference. Markets wanted to hear what Powell had to say about the recent banking issues. Powell said “The U.S. banking system is sound and resilient” as you would expect a central banker to say. Markets were looking for a pause at this meeting given that raising interest rates even more would put more stress on banks.

For those that do not know, the main reason for banks getting hit is the fact interest rates have been too low for a long time. When rates were low, it was easy for banks to make money. Many banks used free money and bought long-term bonds all because they were making their money on the spread. Now that rates are rising, their risk management is effectively nonexistent, and thus the losses are widespread.

The markets may have liked the pause of interest rate hikes, but it did not like the fundamental reason for it: a potential bank crisis. That explains why markets sold off near the end of the day when many expected them to shoot higher on effectively a Fed pause.

Powell did say the Fed is committed to bring inflation back to the 2% level, but here is the statement that is getting market participants excited:

“The Committee will closely monitor incoming information and assess the implications for monetary policy,” the FOMC’s post-meeting statement said. “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.“

Do you see it? Well I would not expect many readers to. But every Fed statement is compared to the last, and Fed watchers look for the change in diction. The omission or addition of just a few more words can move markets.

And we do have a change in wording. That wording is a departure from previous statements which indicated “ongoing increases” would be appropriate to bring down inflation. With just those words being omitted, markets are seeing this as an indication that rate increases are near an end.

“The U.S. banking system is sound and resilient,” the committee said, in its prepared statement. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”

Powell did acknowledge events in the banking system could result in tighter credit conditions. Which could lead to an economic slowdown.

Currently, the Fed rate is at 4.75%-5.00%. Fed officials have seen the terminal rate at 5.1%, meaning there is likely one more 25 basis point hike then a pause. May is when the Fed is expected to announce a pause in rate hikes, but of course, it depends on the data. UK inflation, which was turning down for three months, suddenly spiked higher. The same could happen in the US.

Now let’s take a look at the current US market set ups. No surprise for regular readers. Our analysis has been spot on.

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The S&P 500 remains in a chop. We are still above the trendline, which means the uptrend remains intact. However, we are finding some resistance at yesterday’s candle highs. What makes us go long? If we can get a candle close above yesterday’s highs.

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The best technical set up remains the Nasdaq. Traders should be watching and assessing a sniper entry on this chart. I want to highlight why we wait for candle closes.

Yesterday, the Nasdaq looked like it was breaking out. The daily candle wasn’t closed, but it was initially green post Fed. And then the sell off ensured that the Nasdaq did not close above resistance and confirm a breakout. Bulls would have been trapped.

We are trying once again today. If the Nasdaq can confirm a nice strong green candle above resistance, you will have a very strong bullish indicator.

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Now this is where things get interesting. The Dow Jones broke below its support, and yesterday’s candle actually confirmed a successful retest. Meaning that sellers stepped in and entered at the resistance retest. This is what is expected in a downtrend. What changes this bearish stance? If the Dow Jones can get a close above 32,600.

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We will end off with the US Dollar. To add more confluence of a Fed pause soon, the US Dollar actually broke below 103, which was our level that needed to hold to maintain an uptrend. We have broken below thus 103 is the new resistance.

 

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