I'm not an economist and pay only partial attention to a small handful of economic reports. But one thing I'm very confident in saying is that when it comes to Federal Reserve, its forecasting abilities are questionable at best.
In late November 2021, while addressing Congress, you may recall when Fed Chairman Jerome Powell ditched the transitory tagline and started talking about rate hikes. Chairman Powell believed inflation would ebb in 2022, but he wanted to give his committee the latitude to raise interest rates in 2022 if the need should arise. Suffice it to say rates have risen in 2022.
Fast forward to Wednesday's Federal Open Market Committee (FOMC) meeting, and we see that the Fed expects inflation to end the year at 5.4%, dip to around 2.8% next year, and end 2024 at 2.3%. As a reminder, inflation was supposed to be transitory just 10 months ago. And the Fed only started raising rates in March 2022. Yet we're to believe that the Fed is confident in its estimates of where inflation (and GDP growth) will be in 12, 24 and 36 months? I don't think so.
This is a roundabout way of suggesting traders worry less about the Fed and its projections and pay more attention to what price tells us. If we look at the S&P 500 and Nasdaq Composite charts, we can see that both indexes were quickly rejected from their upside pivot levels. These levels weren't anything unique or proprietary; most traders I chat with were keying off the same general areas.
While you can't see this on the daily charts above, the rejection from 3,900 on the S&P 500 was fast and relatively easy to spot. The rejection from 11,500 on the Nasdaq was less obvious.
The Nasdaq pushed through its upside pivot and held above it for nearly 30 minutes. But once the Invesco QQQ Trust (QQQ) dipped back beneath the session volume-weighted average price (VWAP), I would argue that most momentum traders should have been exiting their breakout-related long positions.
The bottom line is you didn't need to analyze the Fed statement or guess what Chairman Powell was inferring to in his news conference; you only needed to watch and react to the price action.
Is it possible for buyers to emerge here on Thursday morning and reverse Wednesday's declines? Of course. If that occurs and we clear the upside pivots, I expect traders to slip into their bull suits and get long. But barring such a reversal, the path of least resistance continues to be lower.
