Has the market beaten the Fed?
February = 25 bps rate hike? Looks like it's all but guaranteed at this point.
As we enter into the final week of the month, the CME FedWatch Tool now shows a target rate probability of 99.8% that the Fed will only raise rates 25 bps on February 1st. The March meeting probability is currently sitting at an 82.5% chance of one more 25 bps rate hike and 17.4% chance of no rate hike. If you’ve been paying attention, this isn’t surprising. The problem is so many overly-emotional traders remain blinded to what’s actually been happening because they refuse to allow themselves to see beyond what they THINK should happen.
This is a psychological trap found in all markets all the time. As mentioned last week, the only thing the market NEEDS to do is whatever it does. Those open to the possibility that we could see a bounce, if not a reversal, have made some good money on the rally off the lows in, both, crypto and stocks. Those who aren’t open to it have lost a lot profit potential.
The overly-emotional people will give you more reasons why you shouldn’t be longing the market. Everything from their expectations on earnings, to their reasons the Fed will continue to raise rates at 50 bps and/or above 5%, to analog chart comparisons of previous declines. But remember what I said at the lows, it’s at those points where people tend to get the loudest in support of the current trend.
They continue this level of fervor as price rallies against them until they finally give in after price has rallied 100% or more. At that point, most become too scared to long because it’s already rallied well, so when the pullback comes they think “Okay, yeah, that was a bull trap. I knew I was right. It’s going to new lows now.” But of course it doesn’t, only increasing their stress and fear creating an even greater inability to enter a trade. This is no different than the euphoria felt at the highs, resulting in the same market participant reactions as price drops.
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The US Dollar (DXY)
The dollar continues its decline into the new week. It is nearing the initial target of the ~100 handle. Impulsively breaking down below that level will activate the next target at the weekly S1 pivot area around~93.834. Continued decline keeps downward price pressure off risk assets and that will make it even easier for stocks and cryptos to continue rallying.
I posted the above chart a week ago. This outlines the Dragon pattern, which is a version of a double bottom. As seen, price has reached the first two targets and is now nearing the third and final target as of today. That target has a range of $23,933-$26,000. Within that range, I am looking for price to target the ~24900 area, but am also open to price, ultimately, reaching the ~26470 area if it continues to breakout above the target range.
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The Ethereum chart continues to show a clean breakout and rally. We can note that price has almost reached the initial target at ~1700. Further rally keeps the 1815 and 1987 targets alive. Both, the 50MA (blue) and 200 MA (red) have curled up and the faster MA is nearing a golden cross above the slower MA.
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We can note that the pullback terminated at the thick red horizontal support/resistance level. At that point, it caught a bid and rallied impulsively back above the daily pivot. Breaking out higher gives us a target of the ~4157.75 area and continues to add support to the ABC corrective scenario. The only question is whether the current low is a completed correction, or is it only wave (W). If the latter, then this is a counter-trend wave (X) rally which will only be in three waves. And that will lead to one more ABC decline to a new low to complete wave (Z) and the larger corrective scenario.
The market is aggressively pricing in a 25 bps rate hike in February as we've been watching. The Fed's preferred inflation gauge, PCEPI, is due out on Friday, January 27th. With the US Industrial Production falling 0.7% last month, and the previous month revised lower, continuing the downtrend for much of the year, while retail sales were down 1.1% last month, which was more than was expected, it's difficult to find any real reason why we would see PCEPI surprise to the upside. The trend remains down as it has dropped from 6.4% in July 2022 to 5.5% in November of 2022. And as long as it continues to decline, the Fed has significantly less fuel to continue raising rates, much less aggressively doing so.
The jobs report on February 3rd, just a couple of days after the Fed decision, is what interests me at this time. Do we finally see a decline or just more decline in growth? With everything else as it is, a decline would test the Fed’s resolve in not pivoting. As it stands, a pivot looks likely by summer with the charts showing little support for a strong dollar and risk assets having the appearance of a market bottom.
With all that in mind, while cryptocurrencies rally, crypto-specific and tech stocks should continue to be a good long trade. These include COIN 0.00%↑, RIOT 0.00%↑, MARA 0.00%↑, HIVE 0.00%↑,HUT 0.00%↑, AMZN 0.00%↑, AAPL 0.00%↑, META 0.00%↑, MSTR 0.00%↑, TSLA 0.00%↑, PYPL 0.00%↑, and the likes. We are likely to see a pullback soon, but that's all it should be and my expectation is that we will see them rally higher afterward.
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