A Look At The SPY Into The FOMC Decision: Is The Bear Market Over Or Did It Form Another Bull Trap?

The SPDR S&P 500 SPY was bouncing up about 0.5% on Wednesday, regaining the 200-day simple moving average, ahead of the Federal Reserve’s 2 p.m. interest rate announcement. 

Ahead of the decision, the U.S. Labor Department on Tuesday reported a 7.1% year-over-year increase in the November consumer price index, causing the SPY to gap up 2.82% higher, where it ran into sellers who knocked the ETF down to near flat.

The CPI data came in below average economist estimates of 7.3% and showed inflation has significantly slowed from October’s 7.7% reading. On Friday, PPI data for the month of November came in at 7.4% year-over year, down from 8% in October but slightly above economist estimates. The Fed will consider both data sets to guide its Wednesday decision.

After four consecutive 0.75% rate hikes, the Fed is widely expected to start shifting its policy by applying a 0.5% raise Wednesday. 

When Fed Chair Jerome Powell signaled the Fed may begin to shift its policy during a speech at the Brookings Institute on Nov. 30, the S&P 500 reacted bullishly, jumping over 3% and closing the trading day above the 200-day SMA. The rally was short-lived, however, and the SPY declined almost 4% over the four trading days that followed.

When the Fed issues its decision, the indices are likely to react wildly, rallying on a 0.5% hike and even more so if a surprise 0.25% raise is applied. If the Fed decides to raise rates by 0.75% for a fifth time, the market could bleed significantly lower.

It should be noted that on smaller time frames, the market’s initial reaction to the Fed’s decision can be the opposite of the longer-term trend.

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The SPY Chart: The SPY negated a possible downtrend on Tuesday by printing a higher high above the Dec. 1 high of $410. For an uptrend to be confirmed, the ETF will eventually need to retrace to print a higher low above $391.64, but traders and investors would prefer the SPY prints its next higher low above the 200-day SMA.

• In addition to the 200-day, the SPY has resistance above at a descending trendline, which has been holding the ETF down since Jan. 3. If the SPY can regain the trendline as support over the coming days, it could indicate a long-term reversal to the upside.
• If that happens and the SPY pops up over $417, the ETF will have rebounded 20% off the Oct. 13 low of $348.11, which would suggest the bear market is over. The likliness of a Santa Claus rally in that case would increase substantially.
• If the stock market suffers a bearish reaction to the Fed’s decision and plunges under $391, Tuesday’s bullish price action will serve as a bull trap, and a longer-term downtrend could be on the horizon. Wednesday’s price action saw the SPY trading in a neutral inside bar pattern, which indicates the future price action lays solely with the Fed.
• The SPY has resistance above at $404 and $408 and support below at $400 and $394.17.

Read Next: Larry Summers Pats The Fed On The Back Ahead Of Pivotal Interest Rate Decision: What You Need To Know Ahead Of The Print

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