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Federal Reserve Alert: How to Trade Nasdaq, S&P After the Rate Hike

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The day is finally here. Later this afternoon, the Federal Reserve will announce its first rate hike in quite some time.

Investors have been fearful of a rate hike for several months now, part of the reason why U.S. stocks have been plunging in 2022.

Of course, worries of a recession due to spiking inflation and a war in Eastern Europe aren’t helping sentiment. 

So far, stocks are rallying ahead of the event. The S&P 500 is up 1.6% on the day, while the Nasdaq Composite is up 2.6%. That follows yesterday’s rallies of 2.1% and 2.9%, respectively.

Despite investors’ gut feeling, stocks can and dorally in a rising rate environment. At least historically that is the case.

The concern now is that the market is using up all of its buying power — is it just a short-covering rally ahead of the Fed? — ahead of the event. Let’s look at the key levels. 

Trading the S&P 500

Daily chart of the SPY ETF.Chart courtesy of TrendSpider.com

I have been adamant that we may see a decline in the days and weeks leading up to the Fed event and a rally after. We’ll see if that pans out despite an early start to the rally this week. 

The SPDR S&P 500 ETF  (SPY) – Get SPDR S&P 500 ETF Trust Report has been holding up better than the Nasdaq, as you’ll see below. However, both have been under plenty of pressure.

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How the market trades for the rest of this week will be telling in whether we get a sustainable rebound or simply a sell-the-news event and continuation lower.

On the daily chart above, note how the SPY is struggling with the 61.8% retracement of the current range, although it is trying to push above it and the 21-day moving average. If it can continue higher, the SPY faces the daily VWAP measure and the 10-week moving average between $436 to $438.

Above $440 and the 200-day and 50-day moving averages are in play, the latter of which has been resistance for many stocks that have seen short-term rallies.

On the downside, a break of the $425 to $426 area and failure to reclaim this zone opens the door back down to the $415 level, which comes into play near this month’s low.

Trading the Nasdaq

Daily chart of the QQQ ETF.Chart courtesy of TrendSpider.com

We’re looking at the Invesco QQQ Trust ETF  (QQQ) – Get Invesco QQQ Trust Report, which is more accessible for investors than the Nasdaq futures (NQ). 

In any regard, note how it’s being repelled of the declining 21-day moving average — which has been active resistance — as well as the 61.8% retracement.

On a sustained push above these measures, it opens the door to the $345 to $347.50 area, where the QQQ finds the VWAP measure from the January low and the declining 10-week moving average.

Above that puts the fourth-quarter low and 50-day moving averages in play.

On the downside, a gap-fill to $329 is possible without ruining the rally. However, if shares lose $326, then the $318 to $320 area is back in play. The QQQ has done an excellent job carving out support near this zone, but if it breaks, more selling could ensue. 

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