Fundamental
Overview
The Russell 2000 yesterday
sold off aggressively following the FOMC decision as the market perceived it as more
hawkish than expected.
Overall, apart from some
slight tweaks, the Fed was in line with the market’s expectations, and the
selloff might have been an overreaction. There’s lots of noise during such big
events, so be careful of that.
The data is what really
matters now as it will decide what the Fed is going to do. It will likely take
just one soft CPI report in January to see the market reacting in a dovish way
and print new all-time highs.
For now, the conditions for
further upside remain in place. In fact, Trump’s policies should be a positive
driver for growth in 2025 and with the Fed remaining in an easing cycle, growth
should remain positive and might even accelerate as seen already recently by
the Atlanta Fed GDPNow indicator.
The risk in 2025 is of
course inflation and the Fed’s reaction function. Right now, the Fed’s reaction
function is that a strong economy would warrant a slower pace in the easing
cycle and not a tightening. That should still be supportive for the stock market.
If the Fed’s reaction
function were to change to a potential tightening, then that will likely
trigger a big correction in the stock market (if not even a bear market given
the stretched valuations) on expected economic slowdown. For now, we remain in
a “buy the dip” environment.
Russell 2000
Technical Analysis – Daily Timeframe
On the daily chart, we can
see that the Russell 2000 broke below the 2290 support following the FOMC decision. The sellers will
likely pile in around these levels with a defined risk above the 2290 level to
extend the drop into the major trendline. The buyers, on the other hand,
will want to see the price rising back above the 2290 level to start targeting
new highs.
Russell 2000 Technical
Analysis – 4 hour Timeframe
On the 4 hour chart, we can
see more clearly the support turned resistance around the 2290 level where we
have also the 38.2% Fibonacci retracement level for confluence. That’s where we can expect the
sellers to step in to extend the drop into new lows, while the buyers will look
for a break higher to target a rally back into the all-time highs.
Russell 2000 Technical
Analysis – 1 hour Timeframe
On the 1 hour chart, we can
see that we have a minor upward trendline defining the current pullback into
the resistance. The buyers will likely keep on leaning on it to push into new
highs, while the sellers will look for a break lower to position for new lows. The
red lines define the average daily range for today.
Upcoming
Catalysts
Today we get the latest US jobless claims figures, while tomorrow we conclude
the week with the US PCE data.
This article was written by Giuseppe Dellamotta at www.forexlive.com.
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