Your Primary Focus During “Fed Week” MUST Be the S&P 500

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As we enter “Fed week” this week, with Wednesday’s Federal Open Market Committee statement looming large, correlation among stocks and sectors will likely run high for coming days. Whatever the Fed signals — to hike or not to hike? — in the near future, stocks likely will react in sync.

beat the bell stock investing adviceWhat this means to you? Focus on the indices, like the S&P 500 and the Nasdaq, as opposed to single stocks or even single sectors.

For active investors and traders this also means having a good handle on what technical support and resistance areas to focus around on the benchmark S&P 500.

Investors have gotten increasingly nervous about the Fed’s potential “lift-off” for interest rates, which has been well-represented by a) rising bond yields in recent months and b) a notable spike in bond volatility. It is my base case that the uptick in volatility that we have seen over the past 12 months from commodities (the collapse in oil), currencies (a sharp move higher in the U.S. dollar) and the recent turmoil in bond markets will ultimately trickle over into equities.

Both recent and historical implied volatility for stocks is simply too relatively low/cheap compared to other asset classes.

Furthermore, while few people expect a steep and linear rise in interest rates in coming years, it is the dynamics of coming off a zero-interest-rate environment that’s causing disruption (and hence volatility) in the bond markets where the exit doors are too small for everyone to leave at once.

S&P 500 Charts

For the S&P 500, the uptrending price action over the past seven months or so has come on waning upside momentum, as represented by the Relative Strength Index (RSI) at the bottom of the chart. The net result through is that the index has formed a rising wedge pattern, as outlined by the blue straight lines, which has the 100-day simple moving average (currently near 2,085) as its best reference support moving average.

A decisive break below the 2,070-2,085 area on a daily closing basis — particularly if this were to occur after the index makes a lower high versus its May highs would likely call for a deeper 10% — 15% correction in coming months.

Alternatively, should the Fed remain dovish and calm investor fears so that bond volatility doesn’t spike further, stocks could rally and send the SPX index past 2,110 and on its way toward 2,150. Even a rally, however, would likely ultimately fail to hold as a broad-based breakout considering the aforementioned divergence between price and momentum, as well as the sluggish performance of key sectors.

sp 500 spx
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While active investors and traders should focus on a high-correlation week for stocks and thus f0llow the indices, the financial sector — as represented by the Financial SPDR (NYSEARCA:XLF) — is particularly exposed to changes in interest rates, and thus, you can get some clues from it.

Over the past few months, I have continuously reiterated my bullish view on banks given the rise in interest rates, and financial stocks as a group have indeed rallied both in absolute as well as in relative terms versus the broader stock market. The financial sector has thus also helped hold up the SPX index while a host of other important sectors have topped out.

If financial stocks begin to break down for a multimonth correction, then the S&P 500 will also have lost another leg of support.

XLF
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In summary, quicker traders could play a break above 2,110 toward 2,150 while more tactical investors would be wise to further reduce long positions upon a post-FOMC rally.

Alternatively, a hawkish statement out of the Fed would likely pressure stocks and a break below 2,070 (last week’s reaction lows) could open up the possibility for a deeper correction.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/focus-sp-500-fed-week-spx-index/.

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