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Stock market could see massive move after Fed (NYSEARCA:SPY)

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The S&P 500 ETF (NYSEARCA: SPY) continues its decline, and so far every rally has failed miserably. Investors continue to search unsuccessfully for a bottom, and they’re struggling to find one, perhaps because there isn’t one in sight. We would have thinks that after seven weeks of declines on the index and the ETF, the market should rebound. But so far this has not happened.

This brings us to the very important minutes of Wednesday’s FOMC. Minutes have taken on a life of their own over the past few months and have become, to some extent, more important than actual FOMC meetings. This may be because the FOMC minutes have, in a way, been used to telegraph future decisions from FOMC meetings.

The Fed Minutes

As reported on April 5, the Fed minutes served to sell the news for the SPY and the wider market. This time may be different as the FOMC meeting offered a minimal bounce.

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Additionally, the VIX is trading at much higher levels than other versions of the FOMC, with a current value of 30. This would imply that traders are already quite well protected ahead of this event. and may not need to add more puts.

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No panic yet?

So does that mean these minutes could deliver that big relief rally that many investors have been looking for? It’s possible, but there’s another problem here: while the market is looking for that much-needed short-term bottom, we haven’t seen those usual capitulation-type moments associated with a bottom, like a VIX. exceeding 40 or a put-to-call ratio close to 1.5.

These Fed minutes could offer the market the opportunity to create that moment of capitulation, at least in the short term, especially if they signal that the Fed has no intention of slowing down. These Fed minutes could provide that short-term market bottom, with an increase in the VIX and the Put-To-Call ratio.

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This means that the Fed’s minutes may be a game-time decision in terms of what the market decides to do, and it may be that this initial reaction is simulating everyone, like the FOMC meeting did. But given the latest quarterly results from retailers and today’s very disappointing new home sales, coupled with Snap’s (SNAP) earnings warning, there are clear signs that the economy is slowing.

The significant risk to the market is that current conditions are ripe for a strong downward push, especially if the minutes show the Fed is ready to break inflation and willing to create a substantial economic downturn to do so. .

Patterns Persist

The technical chart also suggests that the declines may have more to do before that is said and done. The relative strength index has not reached a value below 30, indicating that the ETF is not oversold. Additionally, there is a strong downtrend that has been in place since mid-April, which at this point offers substantial technical resistance. Additionally, the ETF is currently consolidating between $380 and $400, which is similar to what happened in late April when it was consolidating between $400 and $420.

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In this context, another trend set in, with these very marked upward movements a day or two before a Fed event, followed by a strong sell-off. The first surge came ahead of the May 4 FOMC meeting, which saw all gains surrendered, followed by new lows. The second surge came before the Wall Street Journal’s May 17 Q&A session with Jay Powell, followed by all the gains fading and new lows.

Now there has been a ramp-up that started on Friday, May 20, before the Fed minutes. So far, all these gains have do not been returned. If the trend persists, there should be new lows following the Fed minutes and a potential break below $380.

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Also, the June Fed meeting is preparing well with the March FOMC meeting. June 15 will be the next FOMC meeting, followed by options expiration on June 17, and then potentially two weeks of quarterly rebalancing to end June. Almost identical to the footage seen at the big rally in March.

If anything is clear, the Fed minutes carry huge risk as the market looks poised for a massive move. Picking which direction seems like an impossible task, but if the trend persists, that move may be lower first, giving investors the capitulation they’ve been looking for.