Trading Post-Fed Price Action

Hey 5-Star Trader,

We’ve made it through the very highly anticipated FOMC meeting, and at this juncture, trading price action is all about the post-Fed reaction. 

There have been so many known quantities that have kept the market down, including:

  • Worst inflation in 40 years
  • The current war in Ukraine and potential additional aggression
  • COVID supply chain & employment issues
  • Russia/Ukraine supply chain impact
  • Rising Federal Funds rates
  • Rising mortgage rates – up almost 50% this year already
  • The beginning of quantitative tightening

While each of these macro issues weighing on the market individually are issues, the biggest issue we have faced in the past few weeks, as it relates to the Federal Reserve, anyway, has been the fact that we didn’t know exactly how aggressive they would be as it relates to their hikes, nor did we know if they would adjust as it relates to the volatility in the stock market. 

Well, at this juncture, we have our answer. And, what the market likes best is known quantities, more so than the unknown. Click on this summary to learn more about it! 

After the Fed meeting, the indexes rallied over 2.5% on the news. Traders often ask:

Why is the market rallying when the Fed raised rates by half a percentage point, the largest move since 2000? Doesn’t this mean inflation is a serious problem, and the Fed moving so swiftly is bad for markets?”

It all goes back to the concept of what is, or is not, ‘priced in.’ The market was expecting a half a percentage hike, with the potential of a three quarter point hike, and we got a half point hike! Even though it’s a bit of an extreme move, market participants knew it was coming. Certainly, the fact that the hike wasn’t more significant is a relief to market participants. 

We also had the situation of high put/call ratio, which was indicative of the fact that far too many traders were short and hedged going into the report. Whenever too many are on one side of the trade, there is always the potential of a big move, like the one we are getting today. There have been multiple occasions where investors were incredibly bearish going into major Fed meetings, and once the relief rally took hold, we ended up seeing some of the biggest moves of the year. 

So, what now?

We were down on market lows and we’ve needed a catalyst for upside for quite some time. This meeting today doesn’t fix all that is wrong with the market unless we begin to break major resistance zones on the upside. However, we can still trade some relative strength longs to the upside.

Some of my favorite tickers to trade when we get an upside rally include Tesla (TSLA), Nvidia (NVDA), Advanced Micro Devices (AMD), Microsoft (MSFT), and Apple (AAPL). While I have been on the ‘Sell in May’ train, at the same time, I’ve been looking for an oversold bounce. I already edged into NVDA, and I will start the others IF we get a follow-through day today. Right here and now, it’s all about the follow-through. 

Fed Day moves can be massive, but, if they don’t last…it doesn’t matter much! Oftentimes, they can fade almost immediately. So, let’s wait and see what happens during today’s session because that will make all the difference in the world. Watch (and potentially trade) those market leaders I mentioned. If they start fading, then it’ll be sad to say, but the one day rally will be a thing of the past!  

-Danielle =)

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