The Nasdaq stays under pressure as traders hedge into the FOMC decision risk
FUNDAMENTAL
OVERVIEW
The Nasdaq was on the verge of a breakdown last week as continued
escalations in the Strait of Hormuz and hawkish Fed expectations sapped
market’s optimism. Everything changed on Thursday when Trump cancelled his
planned attacks on Iran and announced a deal with confirming reports from the
Iranian side. This surprising breakthrough triggered a strong reversal on
expectations of lower oil prices, easing inflation concerns, lower risk of rate
hikes and improved growth outlook.
In the short-term, the focus continues to be on this new development, so we
can expect the bullish bias to hold (all else being equal) but the FOMC
decision today remains a risk and that’s likely why we’ve been seeing some
weakness since yesterday as traders hedge into the event.
The Fed
is widely expected to keep interest rates unchanged and remove the easing
bias from the statement. At this meeting, we will also get the Summary of
Economic Projections (SEP) where inflation is expected to be revised higher
while the unemployment rate could see a slight downtick in the short-term. The
focus will be mostly on the dot plot which is expected to show no cuts this
year and the next. All of this is expected and already priced in.
- You can find a comprehensive Fed preview here
The main hawkish surprises include a rate hike in the 2026 dot or more than
one in 2027. In this scenario, we will likely see a selloff in the Nasdaq with the
price falling back to pre-deal levels. On the other hand, the dovish surprises
include a rate cut in the 2026 dot or in the 2027 dot as that would implicitly signal
an easing bias. In such a scenario, we can expect the Nasdaq to rally into new
record highs in the next days.
Fed Chair Warsh’s first press conference will also be in focus, although I
would argue that the Board is going to be more important than the Fed Chair at
least until the markets get to know him better and he proves to be independent.
Trump just gave Warsh a big assist by ending the war, so he can say the Fed can
look through the short-term increase in inflation.
Looking ahead, the risk is that the negative supply shock caused by the
US-Iran war turns into a positive demand shock as the conflict ends that boosts
economic activity further requiring rate hikes anyway. That’s likely to be the
next tail risk.
NASDAQ TECHNICAL
ANALYSIS – DAILY TIMEFRAME
On
the daily chart, we can see the Nasdaq probed below the key 28,700 support but eventually bounced
back strongly on the surprising US-Iran breakthrough and extended the gains
into new all-time highs as optimism grew. There’s not much we can glean from
this timeframe, so we need to zoom in to see some more details.
NASDAQ TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME
On
the 4 hour chart, we can see the
market opened the week with a positive gap and rallied into new highs. From a
risk management perspective, the buyers will have a better risk to reward setup
around the 29,800 support to position for a rally into new record highs. The
sellers, on the other hand, will want to see a break to pile in for a drop into
the 28,700 level next.
NASDAQ TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, there’s
not much we can add here as the 29,800 support zone provides the best dip-buying
opportunity from a risk to reward perspective. Ideally, we see weakness trading
into the FOMC decision and then a reversal from the support as the Fed delivers
on expectations with no major hawkish surprises. Conversely, hawkish surprises
should send the market back to pre-deal levels. The red lines define average daily range for today.
UPCOMING CATALYSTS
Today, we have the FOMC
rate decision. Tomorrow, we get the latest US Jobless Claims figures. On
Friday, the US-Iran “peace deal” is expected to be signed in Switzerland.
This article was written by Giuseppe Dellamotta at investinglive.com.