Introduction
The S&P 500 has broken above all-time highs today on expectations that the first rate cut in four years is coming on the 18th of September. Traders are anticipating the first rate cut since March 2020, which comes after a prolonged period of high interest rates aimed at ‘combating inflation’. The expectations are that there will be a cut between a 0.25 and 0.5 percentage points but markets are not really phased about the size of the cut. They are focusing more of their attention on the fact that the first cut in 4 years is happening, and so traders are front-running the next leg up. Keep this is mind as you make your trading decisions moving forward this week. as shorting the market could be a very risky game.
Technical Analysis
The most prominent feature on the daily chart is the gap-up green candle from yesterday’s (16th September) session. This is a very bullish technical feature on a chart as it shows huge amounts of demand. Bears normally want to try and close this gap but the likelihood is slim as the rate decision comes tomorrow. It is possible, however, that we see a buy the news, sell the rumor event, in which case a sell-off could commence. This would likely only come if Jerome Powel is more dovish than expected in the press conference.
Bull Case Scenario:
- Short-Term (1-2 weeks): The price could rally towards the R1 level at 5,846.75. A pullback to retest the breakout level around 5,719 would be healthy and could serve as a high-probability entry point for long positions.
- Medium-Term (1-3 months): If the Fed delivers a rate cut, the market could sustain its rally towards the R2 level at 6,022.25. This rally could be driven by the expectation of a more favorable economic environment due to lower borrowing costs, improved corporate earnings, and heightened consumer spending.
- Long-Term (3+ months): The projection of a series of rate cuts into 2025 creates a constructive environment for equities. If the Fed follows through with multiple cuts, we could see much higher prices into the end of 2024.
Trade Setups:
Breakout Trade:
- Buy on a decisive break and close above the all-time high (after FED event).
- Use a trailing stop to secure profits as the price approaches the pivot point indicator resistance levels.
Final Call:
- Short-Term: We have a bullish bias, expecting the price to continue rallying toward the R1 level at 5,846.75. The anticipation of the Fed’s rate cut and the recent technical breakout support this outlook.
- Long-Term: The macroeconomic outlook of multiple rate cuts into 2025 means a favorable environment for equities. The bullish trend could target the 6,400 region over the next several months, assuming the Fed’s policies stimulate economic growth without triggering adverse side effects.
