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TSP Talk: Very volatile trading after Fed rate hike / policy statement

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It was one of the more volatile reactions to a Fed meeting that we've seen in a while, and that's saying a lot since they are almost always market movers. Up 200-points at the highs, and closing down over 500-points at the lows, it was a wild day for the Dow and the other indices. Those highs and lows both came after the Fed raised rates by a quarter point, but it was actually a statement by Treasury Secretary Janet Yellen that may have turned the markets sharply lower.

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The Fed reiterated his elevated concern about inflation and committed to their 2% inflation target. He also addressed the stubbornly strong jobs market and these triggered an initial sell off, but dip buyers jumped in at an otherwise more dovish outlook from the Fed who may have hinted that there is an end in sight for interest rate hikes, and stocks were up strongly before his press conference was over.

However, Treasury Secretary Janet Yellen testified in front of the Senate Appropriations Subcommittee on Financial Services yesterday and her statement that she wasn't considering ways to guarantee all bank deposits, seemed to coincide with that late sell off in stocks.

The question is, did any of that wild action resolve anything? The S&P 500 is actually still up for the week after yesterday's 1.65% loss, and while we did see some troubling failures at resistance, support held for the most part. Yesterday's selling filled the open gap on the chart (red box) and it also closed back below the 50 and 200-day EMA, although it landed right on the orange 200-day simple average and the rising support line of the recent lows.

It's tough to make much of the volatility action on a Fed day, or even the day after as investors and traders jockey for position as they try to make sense of what the was being said and how it will impact the economy and the stock market.

Yields fell sharply on the day as recession fears are still alive and well, and the Fed didn't give any concrete reasons why that won't happen. The 2-year yield finally moved back below 4% when the Fed didn't sound quite as hawkish about rates, but that could be taken as a concern for economic conditions. The 2 and 10 year yield curve is still very much inverted.

The decline in the yield of the 10-year filled an open gap, but there is still a large open gap up by 3.9%.

The dollar fell sharply and that helped the I-fund outperform with a much milder loss yesterday, but of course the overseas markets were closed when the Fed announced the rate hike and had his press conference.

The charts down below will show the failures at key resistance levels, but yesterday's action surprisingly didn't do a whole lot of damage -- yet. there are some negative formations that could turn things ugly in the coming days.

I posted a close up version of the S&P 500 above, but this one zooms out a bit and I noticed a bunch of head and shoulders patterns all over it, which are generally bearish. Was this recent rally just another right shoulder forming, destined to fail below the high at the top of the head near 4200? Yesterday's action suggested that as a possibility. That is why getting over 4100 before revisiting the neckline near 3800 is obviously critical for the bulls, otherwise a head and shoulders breakdown would have some very ugly target levels -- below what this chart even shows.

The DWCPF (S-fund) hit the bottom of that trading channel that broke down earlier this month, and failed. It didn't even make it up to fill that open gap above 1660. Now it is in a pretty distinct looking bear flag. However, there was a similar bearish looking flag back in December that turned out just fine for the small caps. That's not typical, but last year many flag breakouts went the wrong way. I don't think I would count on that, but we've seen it is possible.

The EFA (I-fund) was up very sharply during the Fed's press conference, but it tagged that overhead resistance line and collapsed. Collapse may be too strong since it only lost 0.35% on the day, but if those open gaps are going to get filled, there may be more downside left to go.

BND (bonds / F-fund) continues to churn near the top of the right shoulder of the head and shoulders pattern, and it has been so sticky near the top, that perhaps it has formed a bull flag? That throws a bit of a wrench in the head and shoulders pattern theory. Fundamentally I would think that yields may need to come lower if the Fed is nearing the end of its rate hiking and a recession is looming, and that would mean bonds and the F-Fund would go higher. So, that 74 area looks to be looming large and there's a big open gap up near 74.35. This looks interesting and could go either way.

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Thanks so much for reading. We'll see you back here tomorrow.

Tom Crowley

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S&P500 (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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