The SPY Stays Muted Into Fed Meeting But Fireworks Are Likely Ahead: What To Watch

The SPDR S&P 500 SPY was trading in a tight 1.27% range on Wednesday in comparison to the last five trading days where the ETF has swung up to 4.66% in a single session.

Traders and investors are awaiting the release of the Federal Reserve’s minutes and Fed Chairman Jerome Powell’s subsequent press conference where the timetabling for the central bank to raise interest rates is expected to be revealed, which is likely to set off firecrackers in the stock market.

The Fed is expected to announce up to four rate hikes in 2022, with the first hike set to take place in March. The SPY may have already priced in that probability with a 12.34% drop between Jan. 4 and Jan. 24.

There is a chance the Fed takes a more dovish tone, however, and proceeds with a plan to raise rates just twice, with the second hike in July, in order to see if supply chain issues begin to resolve, which could help bring inflation down without a need to raise rates again later in the year.

The Fed could also hold off on announcing rate hikes altogether this month until it becomes clearer on how the rapid spread of the omicron COVID-19 will affect the economy. The Bank of Canada made the decision to hold its key overnight interest rate at 0.25% on Wednesday amid ongoing uncertainty around the pandemic.

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The SPY Chart: On Monday, the SPY fell through the 200-day simple moving average, which threw it into bearish territory. The SPY hasn't traded below the level since June 29, 2020. The ETF then retraced to $420.76 on Monday but buyers came in and bought the dip, which caused the SPY to print a massive bullish hammer candlestick.

On Tuesday, the SPY printed an inside bar in consolidation and on Wednesday broke up bullishly from the pattern. By mid-day, the SPY looked to be printing a doji candlestick, which in this case indicates an equilibrium where there are neither many sellers nor buyers. The candle will most likely change drastically after 2 p.m. EST when the Fed’s minutes are released.

The SPY’s relative strength index (RSI) is measuring in at about the 34% level, which indicates it's near oversold and could bounce up further. The SPY will need to regain the 200-day simple moving average, however, to give bullish traders confidence going forward.

The SPY has resistance above at $441.80 and $447.06 and support below at $437.94 and $433.69. It should be noted that once the minutes are released, the SPY is likely to bust through support levels or fly through resistance levels with little difficulty.

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