Central banks have worked the past two weeks to exert influence over economies worldwide.

This week the U.S. Federal Reserve (Fed) could tip the scales toward a positive or negative stock market run into the end of the year.

Traders can only wait until the Fed announces its next step midweek.

Earnings reports fade as traders watch Fed

The stock market was in a choppy phase throughout the session Monday as the stock market opened down and struggled to recover early losses.

The Volatility Index (VIX) and U.S. Dollar Index (DXY) moved higher against any market momentum. When the VIX and DXY gain ground, the equities tend to lose.

Third quarter earnings reports last week bolstered the stock market with mostly positive results. Last week saw the Dow finish 6% higher for the week while the Nasdaq was up 3% Friday – despite Amazon, Inc. (AMZN) missing on its earnings report.

“Last week’s action was very impressive considering how many direct shots the markets took with almost every mega-cap tech stock falling so much after earnings, yet the indexes took all those shots and kept on climbing,” said Sam Shames, Vice President of Options at Simpler Trading. “This is wildly strong action.”

Hope may not influence hawkish Fed policy

Sam expressed caution about where the market might turn.

“Remember, we said it’s not about earnings,” Sam said. “Earnings don’t matter – from a full market, SPX point of view right now because there are other forces driving the trade.”

Earnings reports are quickly fading in the rear view mirror as stock market participants place their hopes in the Fed acting more dovish than hawkish this week.

News reports have implied that the Fed is hinting at possibly easing interest rate hikes starting next year, and this is fueling hope among stock market participants.

“So now the market narrative is the Fed is ready to pause/pivot/slow down,” Sam said. “Consider the timing of all this. Remember the market is often used as a signaling tool of a country’s health. In front of elections, it’s probably beneficial to the status quo for folks to feel better about their 401k.”

Traders must watch the substance of Fed plans and what Fed officials say this week.

“Will it be a buy the rumor sell the news event as the market has certainly frontrun the optimism that the Fed is ready to slow down going into December?” Sam asked. “Even though I expect the Fed to be a sell the news event considering the huge run up, the tell will be in how it handles the pullback.”

More stock market signals to follow this week

Sam continues to watch the inverted yield curve.

“The yield curve had a very large steepening last week,” Sam said. “Folks may read this as bullish on the surface. The problem is that the real ‘crashes’ happen when the yield curve rips from inversion back to positive.

He sees the yield curve being spun as bullish in the near term, but expects that in the intermediate and longer term this is a strong caution signal.

As the stock market plays out this week, Sam is watching the S&P 500 (SPX) and its hourly 50-day simple moving average chart signal.

“This is the lynchpin level for bulls to continue to hold on all pullbacks,” Sam said. “If bulls continue to hold this level, they will be in control in the near term. If they lose this level all their progress gets washed away.”

Sam encourages traders to remain alert for large drops in the indexes because there is so much distance back down to support levels on the indexes. When the heat of this wild action is in play, Sam plans to take profits at resistance levels or at the third average true range marker on the hourly and daily charts.

To navigate through the next phase of the stock market, Sam plans to forego any walks on the beach on the weekend and put in the extra work studying the charts to give himself an edge.