News Events Limiting Upside Stock Market Action


Simpler Trading Team

Nov 21st 2022  .  4 min read

Is the Federal Reserve (Fed) plan to wreck the economy and rein in high inflation finally starting to make headway?

Surging consumer prices, more announcements of technology industry layoffs, and rising loan rates are signs the economy is slowing and possibly heading toward a recession next year. Add in the latest cryptocurrency implosion and the looming threat of a rail worker strike and the economy may be headed for a lump of coal in its stocking.

Traders must take stock in these variables and adjust their trading plan accordingly.

News events stall upside stock market moves

For traders, the daily news saga can be overwhelming if they wander from focusing on stock market technical analysis.

In trading there is always another news event that could upset current momentum. The goal is to find potential trade setups no matter market direction.

Last week the indexes kept trying to rally higher despite negative market sentiment caused by news events.

“While this marks a near-term uptrend, the upside possibilities at this time are limited due to the overall bear market status that remains in place,” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading. “In order to enter a sustainable bull market phase, we will need to see further evidence of declining inflation coupled with remarks from the Federal Reserve that they are considering reversing their rate hike campaign.”

Based on comments from Fed officials last week traders should hold their breath on any significant change in hawkish plans for raising benchmark interest rates.

“Last week was choppy as investors digested mixed economic and earnings reports while Federal Reserve officials continued to publicly speak about interest rates being nowhere near high enough to reduce currently high inflation levels,” Mary Ellen said. “A slowdown in producer prices as well as an increase in job layoffs both pointed to a slowdown in the economy

while Friday’s drop in the leading index has economists concerned that we’re already in a recession.

More news economic data set for release

Traders must continue to adapt to regular changes in how the market reacts to news events.

This is a short week in the stock market due to the Thanksgiving Day holiday. Friday is also a half-day with the stock market closing at noon Central. There is still plenty of economic information hitting the news wires this week.

On Wednesday initial and continuing jobless claims are set for release at 7:30 a.m. Central, followed at 8:45 a.m. Central with the S&P Purchasing Managers Index (PMI) for manufacturing and services. The University of Michigan (UMich) Consumer Sentiment Index will release its data at 9:00 a.m. Central. And the Fed will add to the mix with the Federal Open Market Committee (FOMC) minutes release at 1 p.m. Central.

“As noted in prior reports, bad news for the economy is generally good news for the markets as it creates a path for a lower interest rate policy,” Mary Ellen said. “On the other hand, strong retail sales in October show that consumer spending remains elevated. Consumer spending is a large part of the U.S economy and continued spending will keep inflation high.”

Continued high inflation pushes the Fed to maintain its aggressive stance to raise interest rates and enact policies that slow economic growth.

In this environment, traders must be aware of what is happening throughout the stock market.

“We would continue to keep new positions light with a nimble mindset,” Mary Ellen said.

As soon as this holiday week is over traders will return to a stock market anticipating the next round of economic data.

The next PPI report is set for release Dec. 9; CPI on Dec. 13; and the next Fed meeting is set for Dec. 13-14.

‘Rest’ after ‘sprint’ for bullish momentum

Simpler’s traders are viewing this market as continuing in a range with little strength to push significantly higher or lower.

The market struggled last week to break in either direction.

“I am viewing last week as a consolidation of the structure as going into the week the markets were unsustainably red-hot intraday,” said Sam Shames, Vice President of Options at Simpler Trading. “After a full week of going nowhere, SPX has reset its intraday momentum and opened up the range for more playability.

“This is normally bullish as it provides a ‘rest’ after the ‘sprint,’” Sam said.

Sam emphasized the importance of bullish momentum holding at 3,908 on the S&P 500 (SPX).

“If that level is lost there are very large pockets under price which make things very dangerous for bulls unless they push and hold consistently this week,” Sam said.

He is watching for bulls to potentially break above 4,007 to open up structure for higher prices. For now, this market environment is just a trading range between 3,908 and 4,007.