Price action across the stock market was a roller coaster ride for traders to start the week.

When the closing bell sounded Monday, all three major indexes were down. This after the Dow started the day by falling by more than 240 points before rallying almost to a positive gain. Rattled traders face a slew of obstacles ahead this week.

The biggest obstacle is the outsized influence of the Federal Reserve (Fed) which has various board members slated for speeches this week starting Tuesday.

Fed actions continue to influence market

Fed actions have become an oversized influence on the market.

Last week the Federal Open Market Committee (FOMC) raised the federal funds interest rate by .25%. This action sent the stock market on a roller coaster ride into the weekend.

“Events last week may prove to be pivotal for the markets with Wednesday’s sharp rally occurring on the heels of comments from Federal Reserve Chairman Jerome Powell who stated that ‘we can now say for the first time that the disinflationary process has started,’” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading.

“As noted in the past, markets emerge out of a bear cycle after the event that pushed the markets there is removed,” Mary Ellen said. “High inflation was the reason the markets went into a bear phase last year and the Fed’s acknowledgement that it’s beginning to recede is big news.”

Labor, yields boost bulls’ position

Bulls look to be better positioned going forward.

“A new bull phase is marked by an expansion in the number of base breakouts among stocks and this list has expanded over the past several weeks,” Mary Ellen said. “While we’re positive on the prospects for the markets, we would await further confirmation of a new bull cycle before getting fully exposed.”

Mary Ellen noted that further signs of reduced inflation could include the January U.S. Consumer Price Index (CPI) report due Feb. 14.

Lingering on the mind of Fed officials is the strong labor market. The January jobs report released on Friday saw a huge number of new jobs with the total topping way beyond any expectations.

A consistently strong labor market could cause Fed officials to maintain plans to continue raising benchmark interest rates.

“One possible threat for the markets at this time is a rise in interest rates,” Mary Ellen said. “Yields rose on Friday following a strong employment report for January. While we don’t anticipate this (threat), any continued rise in rates would endanger the current uptrend in the Nasdaq.”

Nasdaq leading major indexes this year

Mary Ellen pointed out how the Nasdaq fared better than the S&P 500 last week with a 3.3% gain that was led by outperformance in most of the high-profile technology stocks. As an example, Meta Platforms, Inc. (META) provided the biggest boost after rallying 23% following an earnings report of better than expected corporate results.

“Retailers and semiconductor stocks also helped push the Nasdaq higher as growth stocks continued to post strong gains amid better than expected earnings results,” Mary Ellen said.

Mary Ellen was not surprised by a continuation Monday of the Friday pullback.

“The market’s ability to pull back modestly on Friday despite a very strong jobs report highlights a bullish bias among investors,” Mary Ellen said. “The economy added more than double the expected number of new jobs in January which is very robust. However, investors focused on the wage growth numbers which were down from December.”

With a rush of economic data and Fed speeches this week, the focus will be on corporate earnings releases as well as any movement in interest rates or the U.S. dollar.

“This ‘glass half full’ view sees the combination of a strong labor market with declining inflation as potentially positive,” Mary Ellen said. “In other words, we could see strong demand for goods and services without inflation and soaring rates. This would pave the way for a soft landing of the economy which would keep the markets afloat.”

Traders need caution to avoid traps

Despite some bullish action in the market, Sam Shames, Vice President of Options at Simpler Trading, offered a few cautionary points heading into this week.

Sam’s thoughts include:

• The U.S. Dollar Index (DXY) is at support and deeply oversold on the daily chart with an active bear trap.
• Rates on 10-year bonds are at double major support and oversold on the daily chart.
• Bond volatility is at double-bottom support, and a bounce implies higher volume.
• Key players that have led the rally, technology and high beta, are very extended.
• Powell speaking again this week, Tuesday midday, could upset market direction.

“None of this may matter and stocks may continue higher, but from a probabilities point of view… the ‘easy’ move was last week,” Sam said.

He plans to keep a close eye on a variety of factors affecting the market this week.

“At these levels in the SPDR S&P 500 ETF Trust (SPY) and with many of the things that provided tailwinds to push prices higher at support – rates, dollar – the probabilities imply higher risk than reward which is more favorable to shorter term time frame trading until a deeper daily pullback is had in the indexes,” Sam said.

“This is the best the SPY has looked in over a year,” Sam said. “However, it is near term extended on intraday time frames and is still quite away from support. It can keep going, but mean reversion is almost a law of nature in markets, so the closer one can enter at daily support for swing trades the lower the overall risk.”

As the stock market unfolds this week, the Simpler Trading team will report on what is happening.