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Abstract: On Wednesday, U.S. stocks saw significant volatility following the Fed's monetary policy announcement. Before closing with mixed gains and losses, major indices were still subject to intense fluctuations.

Fundamentals

The Nasdaq Composite Index rose 53.16 points, or 0.4%, to 13,626.48, while the S&P 500 Index increased by 3.58 points, or 0.1%, to 4,372.59, marking another year-high closing level. In contrast, the Dow Jones Industrial Average fell 232.79 points, or 0.7%, to 33,979.33, retracing from its four-month closing high on Tuesday.

U.S. stocks were volatile in late trading amid the Fed's decision to pause interest rate hikes after announcing ten consecutive rate hikes.

The Fed stated that it "decided to maintain the target range for the federal funds rate at 5% to 5.25%," the first time the central bank has left rates unchanged in a cycle of rate hikes since January 2022.

The gains in the Nasdaq and S&P 500 may reflect optimism that inflation will slow enough to convince the Fed not to implement its plan.

The Fed mentioned that keeping interest rates unchanged will give the Federal Open Market Committee (FOMC) an opportunity to assess more information and its impact on monetary policy. However, the latest projections from the FOMC indicate that the Fed plans to resume rate hikes later this year, with a terminal rate of 5.6% expected by the end of 2023. This means that if the Fed decides to resume its recent 25 basis point rate hike, it would suggest that the Fed will raise rates twice more this year.

Back in March, the Fed forecast that interest rates would end the year at 5.1%, in line with the current range of 5% to 5.25%. With the Fed raising its forecast for annual core consumer price growth from 3.6% to 3.9%, another rate hike is expected this year.

As we noted yesterday, the Fed's dot plot in this meeting showed an increase in the terminal rate to 5.6%, exceeding market expectations, while economic forecasts show the Fed sees an elevated probability of a soft landing for the U.S. economy. Fed Chair Powell's speech continued to be firm in his determination to achieve the inflation target, but his overall stance was less hawkish than the dot plot.

We expect a relatively high probability of the Fed resuming rate hikes in July. If the quarter-on-quarter core inflation remains above 0.4% in the third and fourth quarters, there is a possibility of another 25-basis-point hike within the year, with a potential rate cut likely to occur in early next year. And it is expected that the U.S. bond rates and the U.S. dollar index are still oscillating in the short term, lacking a clear trend, while the U.S. stock market may turn bearish following the increase in recession expectations.

Technical Analysis

The DJIA fell sharply in Wednesday's trading. As we mentioned yesterday, whether the Fed raises, cuts, or leaves rates unchanged, the U.S. stock market typically sees a significant pullback on decision days.

With the Average Directional Index (ADX) hovering around its 25 level and issuing range-trading signals, bearish bets are on the rise. In fact, the indicator is trading in its overbought (OB) territory and has just broken below its moving averages. However, a decisive break below its OB territory is needed to continue to support the bears' intentions.

If the bulls decide to retest the August 16, 2022 high of 34,280, they would first have to break the December 2, 2022 downtrend line again. The December 13, 2022 high of 34,930 will be the next target.

On the other hand, the bears are looking to continue to break the 61.8% Fibonacci retracement of the January 5, 2022-October 3, 2022 downtrend at 33,754 and then target the more important 33,342-33,548 area, already showing their determination.

Overall, the DJIA bulls, after failing to break above the key level of 34,280 again, are currently hoping to maintain above 33,754. However, the trading sentiment seems to be against them, and a potential correction may be stronger than their current expectations. But if that level successfully holds as support (as shown in our simulated chart), a break above the 34,280 level would be relatively easy. The U.S. stock market may turn bearish following the increase in recession expectations. In terms of trading strategy, it is recommended to go short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 33981

Target Price: 33638

Stop Loss: 34589

Valid Until: 2022-06-29 23:55:00

Support: 33936, 33754, 33638

Resistance: 34085, 34280, 34589