Before the January inflation data release, the indices were marching reluctantly to achieve the target of the reaction rally against the Jan 24th low. On February 10th, the headline of the January inflation surging 7.5% on an annual basis, even more than expected and highest since 1982 put a stop to the reaction rally.
The selloff in the last two trading days has created a daily cycle top and the selloff will continue until it gets close to the Jan 24th low. There was no certainty about the pending Fed monetary policy change when the Jan 24th low was made, therefore this Jan 24th low is a technical low that needs to be tested just for the market to make sure that low is solid.
On the S&P 500 daily chart below, we outlined the possible market moves in dotted lines as a framework. It is sort of a reverse engineering against the low around March 14th. Please use stoploss orders when you trade with this information. This is only a forecast that is not guaranteed information. The market never does what we expect.
The re-test of the Jan 24th low could be either a slight below or above. If it fails to take out the Jan 24th low, the market would create a bear trap and the market would rally to take out the reaction high around 4600. Because there is no certainty about the pending Fed policy change until mid March, the market will be range bound and rally against the Jan 24th low will be limited.
Why would it take the market to possibly bottom around March 14th?
- Our timing model picked March 14th as an important turning point.
- Coincidentally the next Fed meeting is March 15-16. Typically the Fed releases enough information through Wall Street via talks or subtle hints in the media before the next Fed meeting, so the market would continuously price in the monetary policy changes right up to when the changes are about to happen. The Fed wants smooth transition and will try to get as much information out before the meeting as possible.
- The Wall Street has worked around the Fed polices forever and some of the analysts are very good at predicting the next Fed move.
Hopefully the market could find some certainty after the next Fed meeting and resume the 2nd phase of the current 4-year cycle.
The Russia/Ukraine conflict normally will only impact the market in the short term. In long term, a war either in Ukraine or Taiwan is good for the US stock market because the capital will flow out of the war zone to the United States which in turn will support the US stock market. Despite all the uncertainties in the US domestic politics, the US financial system is still the most stable one in the world.