OVERVIEW
Brace Yourself For Volatility

The stock market is on edge today as we await the Federal Reserve's highly anticipated policy announcement. With the Fed set to make its first interest rate cut since 2020, there’s a lot of speculation about whether they’ll opt for a substantial 0.5% cut or stick with the traditional 0.25%.

In the lead-up to this decision, the market has been relatively stable. After a strong start to Tuesday’s rally, major indexes ended the day on a mixed note, with the initial momentum fading. This pause is common as traders and investors reassess their positions and wait for more clarity.

We’re seeing many stocks retracing after their initial breakouts, reflecting a cautious approach from both buyers and sellers. Everyone seems to be holding back, waiting to see how the Fed’s decision will play out before making any major moves.

Smaller Rate Cut: Potential Disappointment and Market Concerns

If the Fed decides to go with a smaller rate cut, like 0.25% when a larger 0.5% was expected, it could lead to disappointment. This smaller move might suggest that the Fed is being overly cautious or not fully aligned with current economic conditions. Investors might see this as a sign that the central bank is not addressing the issues as robustly as needed. This could result in increased market anxiety and potential sell-offs as traders reevaluate their positions and future expectations.

Larger Rate Cut: Potential Boost to Market Sentiment and Increased Volatility

Conversely, if the Fed surprises everyone with a larger-than-expected 0.5% cut, it could boost market sentiment. A significant cut might signal the Fed’s strong commitment to stimulating economic growth and tackling underlying issues. This could lead to a short-term rise in the stock market and increased investor confidence. However, such a large move could also increase volatility, with potential market swings as investors digest the implications of the cut. A substantial cut might prompt questions about the broader economic outlook, adding to the uncertainty and causing fluctuations as traders adjust their strategies.

So, what does all of this mean for today’s session?

Right now, there’s a notable level of uncertainty surrounding the Fed’s upcoming decision, which is a bit out of the ordinary. Usually, the Federal Reserve tries to communicate its plans clearly to the market to avoid surprises. For most of the past month, investors were expecting a modest 0.25% rate cut. However, in recent days, there’s been growing speculation that the Fed might opt for a more substantial 0.5% cut.

The reason this decision is so closely watched is because a rate-cutting cycle is meant to support a weakening economy and give an extra boost to an already strong market. For instance, the S&P 500 has recently hit record highs, thanks to an 18% gain this year alone. Historically, when the Fed makes its first rate cut, the S&P 500 has seen average gains of around 16% over the next year.

A 50 basis point cut as the initial move in a new rate-cutting cycle is unusual. Many institutional level investors believe it could be too aggressive, especially since the Fed has never started a cutting cycle with such a large cut ever before.

For us as swing traders, the key focus is how the market reacts to Fed Chair Powell’s speech after the Fed’s decision is announced. Our job isn’t to predict or gamble on the market’s direction based on the rate cut itself. The market’s reaction to news can be unpredictable—sometimes, good news can actually be seen as bad news and vice versa. The real challenge is going to be to actually stay patient and agile. We will discuss how we will be positioning ourselves in the daily focus section below.

Nasdaq

The Nasdaq is currently showing a holding pattern, as we’ve noted, with the past three sessions featuring sideways consolidation. The index has been moving along its daily 10-, 20-, and 50-day EMAs and frequently testing its Point of Control (POC) level at $474.

The market is demonstrating a tug-of-war between buyers and sellers. Buyers are stepping in to support the Nasdaq whenever it nears the 10-EMA, while sellers are actively defending the $480 level, unsure of how the market will react to today’s events.

Looking at the hourly chart, this battle becomes even more apparent. We’re seeing long wicks on the downside, indicating strong demand whenever the Nasdaq dips below the hourly 20-EMA. Despite this, it’s been challenging for the index to push above the hourly 10-EMA and especially to break through the $478 level.

We’re at a crossroads regarding how the Nasdaq will react today. While the Fed’s decision is a key factor, technically speaking, the Nasdaq is primed for a significant move. Whether this will result in a breakout or a retracement is uncertain. The market is extremely sensitive right now, and volatility is high, so be prepared for potential swings in either direction especially intraday.

S&P Midcap 400

The midcaps are showing signs of stalling, as evidenced by yesterday's low-volume doji candle. This doji often indicates market indecision, suggesting that participants are uncertain about the next move. While a red doji at the top of an uptrend can sometimes signal a potential reversal, it’s not a definitive forecast.

Looking at the hourly or 30-minute charts, there’s a bullish bull flag formation around the daily Point of Control (POC) level of $562. This pattern suggests that despite the current pause, the overall trend remains positive.

The low volume isn’t surprising given the market’s current uncertainty. Many traders and investors are likely staying cautious, avoiding significant positions ahead of the Fed’s decision.

From a technical standpoint, the situation is clear. The MDY is facing significant resistance and supply, as shown by the dense volume cluster and historic levels of chop in the visible range volume profile (VRVP). This suggests that even without the Fed’s decision, the area around $562 is likely to experience short-term downside or at least some sideways movement.

Russell 2000

The small caps are in a similar position, with their Point of Control (POC) level at $223 still untested. Yesterday’s red shooting star candle suggests a pause or potential reversal in the strong breakout we've seen recently. This type of candle often signals a bearish shift, indicating that momentum might be stalling.

However, it's important to remember that candlestick patterns might not be as reliable right now due to the current market sentiment, which is quite erratic. While the shooting star indicates potential short-term weakness, a strong positive reaction this afternoon could quickly reverse this outlook. Ultimately, we need to focus on the real-time data and remain flexible to adjust as the situation evolves.

DAILY FOCUS
Stay Ready, No Matter the Direction

As we head into today’s big Fed decision, the best move for us swing traders is to stay patient and let the market find its footing. With all the uncertainty swirling around, it’s smart to hold off on adding new positions until we see how things play out, which might not be until tomorrow.

In the meantime, it’s a good idea to take some proactive measures. Consider raising your stop-loss levels to protect against potential losses if the market reacts negatively. Also, taking some profits now could be a wise move to secure gains before the market decides its next direction.

Once the Fed’s announcement is made and the initial volatility settles, you'll be in a better position to assess the new market landscape and make informed decisions. Keep in mind that today’s market could swing widely, and it might not be worth jumping in right away. Instead, give yourself the space to avoid getting caught in the chaos of the first hour after the decision.

Remember, if the market moves against you, it’s okay—this is why managing your downside risk is crucial. And if you see stocks breaking out shortly after the decision, don’t rush in too quickly. There will be plenty of opportunities down the road, and it’s often better to wait for a clearer trend to develop. Being cautious today means you’ll be ready to take advantage of the opportunities that arise when the market calms down.

WATCHLIST
Focus On These On A Strong Reaction

LUNR: Intuitive Machines, Inc.

• LUNR is making headlines this morning, gapping up over 55% in pre-market trading after landing a huge $5 billion NASA contract. This is a major development for the stock, which has been on our radar for a while. We even tried to trade it recently during its breakout phase.

• Given the magnitude of the news, LUNR’s opening price action could be quite volatile. While the overall market sentiment might impact how the stock performs today, the excitement around the NASA contract could lead to significant movement.

• It’s definitely worth keeping an eye on whether LUNR can break above the 5-minute opening range high (ORH), as this would signal strong momentum and a positive reaction to the news.

NVDA: NVIDIA Corporation

• NVIDIA (NVDA) is making a notable move alongside the QQQ's sideways consolidation as we approach today’s Fed decision. The stock is currently forming a bull flag pattern on the rising 10-, 20-, and 50-day EMAs. This setup follows an initial leg up that pushed NVDA close to the top of its multi-month trading range, almost breaking out of its recent volatility contraction.

• Given the strong technical setup and the potential for a positive reaction to today’s rate decision, NVDA could see a significant upward movement if the Fed’s announcement is favorable.

• Tech stocks, including NVDA, generally thrive in a low-rate environment, and the quality of NVDA’s breakout base only adds to its potential. Watching how NVDA reacts to the Fed’s decision could be crucial, as a positive outcome might catalyze a strong move higher.