Stock market on edge ahead of Fed rate hike


Simpler Trading Team

3 min read

Stock market on edge ahead of Fed rate hike

The wait is almost over as the stock market awaits a speech from Federal Reserve (Fed) Chairman Jerome Powell set for 2:30 p.m. Eastern tomorrow. 

Powell is expected to confirm raising the benchmark interest rate moving forward.

Powell is expected to confirm a 75 basis point hike. No one knows if the market will react bullish or bearish, especially if the Fed pushes higher to 100 basis points.

If the Fed calls for 100 basis points as the new benchmark, there is a much higher chance market reaction will be negative. A higher than expected rate hike could send shockwaves through the market.

Key price level fails, can’t find support

The day before the Fed rate hike, the stock market opening bell ushered in another heavy sell-off. The market found itself below the key support level of 3,900 on the S&P 500 futures. This sent the market lower heading into the open, and continued through the morning.

The market ultimately found some support, pushing back toward the key level, but was unable to get back above 3,900. The significance of the repeated failures to get back above this level has continued to show the vulnerability of the market below 3,900.

Not only did the market stop at 3,900, but it was also rejected with strength where sellers could take control of the market. This brought the price of the S&P 500 futures back to the low of the day. 

Another psychological level was brought into play when the sell-off fell through the low of the day at the time, sending the market down to 3,850.

The market spent the rest of the day playing ping pong between 3,850 and 3,900. This range could come into play ahead of Powell’s speech.

Another notable thing in the market heading into the Fed announcement is the Volatility Index (VIX). VIX levels spent most of the day rising, even with the market pushing throughout the day.

Volatility Index  is fear level to watch

The significance of the VIX rising is the underlying fear of something bad happening tomorrow. 

With an event such as the Powell speech, it is not uncommon for VIX levels to rise into the event.

It is essential to watch the VIX as it can give an early indication of the market makers pricing in a possible bullish or bearish reaction ahead of the market.

Generally speaking, the market is more vulnerable when VIX rises and often sends the market lower. On the other side, if VIX goes lower, there is less fear in the market, and bullish sentiment can take hold. 

Final focus before Powell is on 3,900

Does the VIX go lower into the speech, and does the market get back above 3,900? Or, does the market remain below 3,900, and the VIX continues its rise? 

Both scenarios can give insight into what to expect ahead of the speech and after, but the market reaction will tell all.  

At the market close today, the Nasdaq and the S&P 500 were negative to end the session. The S&P 500 futures closed down .99%, losing 39 points, while the Nasdaq futures closed down 0.65%, a loss of 78 points. The Dow followed, closing down 1.03%, declining 319 points.