Fundamental Overview
The Russell 2000 yesterday sold off aggressively following the FOMC decision as the market perceived it as more hawkish than expected.
Overall, apart from some slight tweaks, the Fed was in line with the market’s expectations, and the selloff might have been an overreaction. There’s lots of noise during such big events, so be careful of that.
The data is what really matters now as it will decide what the Fed is going to do. It will likely take just one soft CPI report in January to see the market reacting in a dovish way and print new all-time highs.
For now, the conditions for further upside remain in place. In fact, Trump’s policies should be a positive driver for growth in 2025 and with the Fed remaining in an easing cycle, growth should remain positive and might even accelerate as seen already recently by the Atlanta Fed GDPNow indicator.
The risk in 2025 is of course inflation and the Fed’s reaction function. Right now, the Fed’s reaction function is that a strong economy would warrant a slower pace in the easing cycle and not a tightening. That should still be supportive for the stock market.
If the Fed’s reaction function were to change to a potential tightening, then that will likely trigger a big correction in the stock market (if not even a bear market given the stretched valuations) on expected economic slowdown. For now, we remain in a “buy the dip” environment.
Russell 2000 Technical Analysis – Daily Timeframe
On the daily chart, we can see that the Russell 2000 broke below the 2290 support following the FOMC decision. The sellers will likely pile in around these levels with a defined risk above the 2290 level to extend the drop into the major trendline. The buyers, on the other hand, will want to see the price rising back above the 2290 level to start targeting new highs.
Russell 2000 Technical Analysis – 4 hour Timeframe
On the 4 hour chart, we can see more clearly the support turned resistance around the 2290 level where we have also the 38.2% Fibonacci retracement level for confluence. That’s where we can expect the sellers to step in to extend the drop into new lows, while the buyers will look for a break higher to target a rally back into the all-time highs.
Russell 2000 Technical Analysis – 1 hour Timeframe
On the 1 hour chart, we can see that we have a minor upward trendline defining the current pullback into the resistance. The buyers will likely keep on leaning on it to push into new highs, while the sellers will look for a break lower to position for new lows. The red lines define the average daily range for today.
Upcoming Catalysts
Today we get the latest US jobless claims figures, while tomorrow we conclude the week with the US PCE data.
