As the Fed delivered a more hawkish than expected stance, the market sold off for some days as the risk of an overtightening coupled with a deep recession caused risk aversion across the board, affecting the Russell 2000. The Fed is resolute on bringing the inflation rate back to their 2% target and they are willing to go for a “hard landing” scenario to achieve that.
This can be seen by the subtle hawkish messages like them not revising the terminal rate in the Dot Plot after the miss in the CPI report even if they could do so until the evening or them complaining about the tight labour market hinting that they want to see the unemployment rate picking up.
All of these things point to the two of the worst things for the stock market: overtightening and serious recession.
RUSSELL 2000 Technical Analysis
In the chart above we can see how the market initially spiked up as the CPI report missed again expectations but soon after got faded as the market went defensive into the FOMC meeting. Sure enough, the Fed came out as more hawkish than expected causing a risk-off sentiment in the following days. The price broke down through a swing low support and kept on falling until the selling momentum waned.
In the 1-hour chart above we can see how the price divergence with the RSI was hinting to a loss of selling pressure. In such instances generally the price pullbacks to a previous swing level or the top/bottom of the swing where the divergence started. In the chart above the price retraced back to the top (orange line) of the whole divergent move.
This is also a previous broken swing low support area (blue) that now may turn into a resistance. The price now is struggling right at the resistance as we can tell by the multiple rejections and candlesticks wicks. If the price breaks down through the blue trendline the sellers would be again in control.
On the daily chart above we can see how the CPI spike couldn’t break the resistance area at 1910-1920. After the FOMC the price broke down through the minor blue support zone. As the selling pressure waned, the price pull backed and it’s currently retesting the previous broken support that now may turn into resistance.
On a downward continuation the clear target is the double bottom level at 1642. If we get another “Santa Claus Rally” the price should break up the blue resistance area and reach again the 1900 price zone.