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September Rate Cuts Look Very Likely

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OVERVIEW
Jerome Powell Praises Cool Inflation Data

Good morning, traders!

Jerome Powell spoke yesterday and has shared some pretty big insights. For those who might not know, Jerome Powell is the Chair of the Federal Reserve, which is the central banking system of the United States. He's a key figure in setting monetary policy, including interest rates, which have a big impact on the economy and the equities market.

Powell is has stated that he is very pleased with the progress made on reducing inflation over the past year but stated that more needs to happen before considering any interest rate cuts. At a central banking forum in Sintra, Portugal, he mentioned, "We've made a lot of progress in getting inflation closer to our target." He pointed out that recent inflation readings indicate we're back on the right path. However, Powell emphasized the need to be confident that inflation is steadily moving toward 2% before they start easing up on policies.

While Powell sees progress on inflation, he’s wary of moving too soon and jeopardising the downward trend of price increases, which hit their highest pace since the early 1980s two years ago. “We’re well aware that if we go too soon, that we can undo the good work we’ve done,” he said. “If we do it too late, we could unnecessarily undermine the recovery and the expansion.”

According to Powell, the risks of moving too late as opposed to too soon have become more balanced this year as inflation has eased and the economy and labor market have remained strong. Previously, the Fed was more concerned that cutting rates too soon and allowing inflation to rise again posed the greater risk.

What does this mean?

Interest rates have a significant effect on the equities markets. Higher rates can lead to higher borrowing costs for companies, which can reduce corporate profits and, in turn, lower stock prices. Conversely, lower interest rates can make borrowing cheaper, potentially boosting corporate profits and stock prices.

Earlier this year, markets had expected at least six Fed rate cuts of a quarter percentage point each. Market expectations have since adjusted to anticipate two reductions, one in September and another before the end of the year.

The market mostly trades based on expectations, so it cares a bit less about the absolute interest rate level (though this is still significant) and much more about the general sentiment and what is likely to happen. Powell’s comments yesterday are likely to increase investor sentiment around the potential for interest rate cuts in September, which could spark some bullish action as investors get comfortable with that idea. People may start to price in the expectation that smaller businesses, which are more vulnerable to high borrowing costs, will have an easier time getting debt and funding their growth.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq had a promising session yesterday, regaining its all-time highs at $487 on strong green volume. We saw the volatility contraction pattern (VCP) we had been discussing break out much quicker than expected. Initially, we thought this week would close with the QQQ still moving sideways.

We don’t anticipate much happening in today’s session since it’s a half-day and the market is closed tomorrow for Independence Day.

The ideal scenario, and what we think is likely, is for the QQQ to close the day roughly flat. With lower volume, there won't be enough momentum to push significantly above the psychological level of $490.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps found crucial support exactly where needed to sustain their multi-month Volatility Contraction Pattern (VCP), which has been challenging to break out of recently. MDY ultimately needs to hold above $530. While we aim to see the Point of Control (POC) at $536 breached, we don’t foresee it happening this week due to the limited market trading days.

The irregular schedule this week leaves little time for significant market moves. We anticipate MDY to close the day below or near its daily 10-EMA around $534. This sets us up for another attempt to break above the descending resistance level in the near future.

Russell 2000

IWM VRVP Daily Chart

The small caps are in a similar position, having reclaimed their daily 10-EMA recently, but they're still facing resistance at the Point of Control (POC), and the breakout level around $204 seems distant. This week is unlikely to deliver the breakout we've been anticipating.

However, one positive trend is that IWM has been forming consistent higher lows for weeks, which is a bullish sign. When you factor in Powell’s dovish comments from yesterday, the pressure on small caps is gradually easing.

DAILY FOCUS
Waiting For Next Week- Ride Your Winners

The market received positive comments yesterday from Federal Reserve Chairman Jerome Powell, marking the first step toward an easier monetary environment, which benefits both the broader economy and, importantly for us, the stock market.

While MDY and IWM are still consolidating after several false breakouts, specific small and midcap stocks like ROOT and INSG have been performing well with follow-through. However, this doesn’t mean we're blindly buying anything; breakout potential remains selective and cautious in our approach to new positions.

Given tomorrow's market closure and today's half session, we believe opening new positions for the remainder of the week may not be worth the risk. We're currently focused on managing existing positions that are performing well and looking to add to these trades with minimal risk.

To all our American readers, happy Independence Day! Wishing you a rewarding journey in the markets and a joyful celebration tomorrow!

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WATCHLIST
The Two We Really Like

AMSC: American Superconductor Corporation

AMSC Daily Chart

  • The company name, American Superconductor Corporation, says it all really. It's in one of the hottest sectors and within a booming industry group, making it a stock you genuinely can't ignore.

  • AMSC has shown really strong annual revenue and gross profit growth, and has made significant improvements in it’s earnings per share over the past two years.

  • From a technical standpoint, the stock looks very strong. It has been a momentum leader in recent months, gaining over 60% in just a few weeks. Currently, it's consolidating and forming a Volatility Contraction Pattern (VCP) that appears ready for a breakout to the upside.

  • We're not actively seeking a long position in AMSC today or this week. However, if AMSC does break out on high volume, we might consider initiating a half-sized entry.

GCT: GigaCloud Technology Inc

GCT Daily Chart

  • GCT remains at the top of our scans and growth stock watchlist as it continues to hold its multi-month base. It even showed signs of a breakout a few sessions ago, almost tempting us into a long position.

  • With GCT boasting incredible fundamentals and a textbook Stage 2 base, it's arguably one of the strongest growth stock setups in the market right now.

  • While we're not necessarily expecting a breakout today, we anticipate one could happen imminently.

  • Keep this name on your list, and if it breaks out on high volume, enter with size.

This newsletter does not provide financial advice. It is intended solely for educational purposes and does not constitute investment advice or a recommendation to trade assets or make financial decisions. Please exercise caution and conduct your own research.

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