Warning: A Fed Rate Cut May Not Save the Stock Market

Today at 2:15 PM EDT Ben Bernanke will announce what the Federal Reserve will be doing regarding interest rates. As of now everyone on Wall Street expects either a quarter point or a half point cut. The big question is though how will the market react, and why does it matter to you?

Expected Rate Cut

The biggest reason the Federal Reserve is expected to cut rates is because of the decline in jobs and the decrease in retail sales. Also on there minds is the housing market which continues to lag and what fed rate cuts if any are planned for the future. I am no analyst here by any means, but I would be willing to bet the market reaction will overall be determined by the future outlook of the interest rates, not today’s fed rate cut.

How to React, Buy Or Sell?

The market is up early on this morning with expectation of the rate cut to come, but before buying into the market you need to understand just how critical this afternoon and week really are. If the market reacts negatively and sells off on heavy volume, this is your sign to get out and stay out. On the flip side if the market rallies this week and closes above say 1500 (S & P 500) on good strong accumulation volume, that is your sign to get yourself invested in.

Technically speaking the market is in a critical resistance and support trading area, and I will explain this in both a simple way and the advanced detailed way so everyone can follow.

The Simple Explanation – All the major indices, the S & P 500, the NASDAQ Composite, and the Dow Jones Industrial are all sitting at clear cut resistance if you look at a chart which in this case is the 50 day moving average. They are also within a day or two’s reach of clear cut support, which in this case is the 200 day moving average. So, if these indices can surge upwards on good strong volume and close above resistance, we more than likely have a healthy market ahead of us. But, if the market sells off heavily and the indices trade back down to their support and through it, the market is in most likely for a rough beating to come.

Even more simply put, if the market runs up this week because of good interest rate news (cuts), that is a very good sign for the next few months, but if it falls hard this week then that is a very bad sign.

The Advanced Explanation – The concept is the same as above, but let’s take a visual of the S & P 500 and the NASDAQ and see how things are looking. (Note: if you haven’t seen a stock chart before, read my post on how to read stock charts and my post on the stock market for dummies)

The first chart we are going to look at is of the S&P 500, daily view, over the last 6 months. What you want to take note of are both the 50 day moving average (blue line) and the 200 day moving average (red line) lines acting as resistance and support respectively speaking. Also look at how the volume per day has been relatively low lately, this tells us that a big move either way on heavy volume could very well determine the overall market direction.

S&P 500 Pre Fed Rate Cut

Next we are going to look at the NASDAQ Composite, which overall has the same look and feel as the S&P500.

Nasdaq Composite Pre Fed Rate Cut

Again, it all comes down to not what the feds decide today at 2:15 PM EDT, but moreso the future outlook with any possible fed rate cuts to come.

I am a big believer in not predicting the market trends, but in reacting and following the market trends. Yes we can take a prediction and play the market on the long or short side (read my post on shorting stock), but we are better off not gambling here and simply preparing to react to the federal reserve news.

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Comments

  1. says

    While on the surface the rate cut seems like it would be good for the stock market – two downsides are: this would be confirmation by the Fed that housing is affecting the economy at large to where they need to act, and: the market has already priced this cut in.

  2. Mikel says

    Fingers crossed ehre but I have a feeling that the housing market has already been discounted into the market overall. I guess on the good side, those who need to refi their mortgages will be able to do it a bit cheaper than yesterday. Assuming their creditor is still solvent tomorrow!

  3. says

    Because they cut half a point I am really interested to know where the economy is at as a whole. This to me says there is a big chance of a recession and it is on the Feds minds. So, go bulls for now, but where will be at this time next year?

  4. says

    Blain,

    I also wonder about what this means for the economy. I believe that this move makes the coming economic data all that much more important, not for future rate cut possibilities, but to gauge the health of our economy. We wanted weakness so we would get a rate cut, but we obviously don’t want a recession. Time will tell.

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