Dovish comments from the Federal Reserve (Fed) pushed the stock market to rally higher into the end of last week.

This week bullish traders must watch for hawkish comments from a double dose of Fed speaking engagements. Any indication that the Fed plans for higher benchmark interest rates are still on the table and could play into the hands of bearish traders.

Our team is watching Fed statements along with key economic news events this week that can quickly shift market direction.

Traders face market-shifting events this week

So many times the stock market has been affected by “Fed speak” over the last year.

Last week two different Fed members speaking at different events pontificated their viewpoints. One oration sent the market lower and another preceded a rally.

Traders are awaiting more insight from Fed Chairman Jerome Powell tomorrow and Wednesday when he testifies before the U.S. Congress. His testimony Wednesday is sandwiched between the Automatic Data Processing (ADP) national employment report and the Job Openings and Labor Turnover Survey (JOLTS), both for February.

Fed speak and economic news have created a heightened tussle between bullish and bearish traders.

Bear traps are the talk of Simpler Trading team members.

A bear trap is when the market shows a downward move in price in the middle of an overall uptrend. The bearish trap springs when price actually moves higher.

In the market today, price action started out strong but waned into the afternoon. By the close of the session the market pared earlier gains and ended up mixed across the board.

The Dow squeaked through the day for a positive session, closing at 33,431.44 points to rise just .12% (adding 40.47 points on the day). The Nasdaq missed a positive day, dropping to 11,675.74 points for a .11% slip while the S&P 500 eked out a .07% rise to 4,048.42 points.

Dollar, bonds, indexes… oh, my

Sam Shames, Vice President of Options at Simpler Trading, is watching for bears to get trapped by getting extended particularly in the dollar, bonds, and indexes.

“The only thing that moves markets at this moment is one side overreaching and getting mechanically squeezed higher or lower,” Sam said. “The market is positioned to squeeze the short backlog from February, but we must know what to look for to make sure that idea remains in good standing.”

He is watching how the market handles the first pullback to the 15–minute chart 21-day exponential moving average (EMA). This would be a super aggressive situation. A pullback to the hourly chart 21-day EMA would be aggressive and a pullback to the hourly chart 50-day simple moving average (SMA) would be conservative.

“All these chart points are clues on the validity of the upswing,” Sam said.

Sam sketched out some rough mechanics for this week.

In the U.S. dollar (USD) traded against the Japanese yen (JPY) Sam is watching for major resistance at the daily 200-day SMA. If it fails there, this indicates dollar weakness. Thus, dollar weakness and yen strength helps U.S. bonds short squeeze.

“If bonds short squeeze the entire market will short squeeze, especially technology,” Sam said.

Bear traps may depend on how the dollar moves

The U.S. Dollar Index (DXY) may be the spring for any bear traps this week.

“The dollar has struggled to break 105 on a daily close and the longer it treads water around here the more likely it is forming a bull trap,” Sam said.

Focusing on the dollar can help traders avoid traps from Fed speak or other outside market pressures.

“Keep it simple, as long as the dollar has no daily closes above 105, that skews positive for market bulls,” Sam said. “A break of 105 to the upside makes the bulls case less likely.”

If the dollar stumbles, bulls may get to run.

“A break of 103 on the daily close becomes very bullish for risk assets,” Sam said.

‘Engulfing candle’ could reveal bullish trend

The stock market rally late last week gave bulls hope. That hope may get dashed this week with Fed speak and economic data ahead.

“Last week’s rally followed an early week pullback, with both the S&P 500 and Nasdaq posting a bullish engulfing candle for the week,” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading. “Historically, this can signal a positive change in character for the markets.”

A bullish engulfing candle is a Japanese candlestick pattern that can help determine a new bullish trend as it begins.

“While we’re positive on the near-term prospects for the markets, there are possible roadblocks with Federal Reserve Chairman Powell testifying to both the U.S. Senate and the House on Tuesday and Wednesday,” said Mary Ellen. “Impactful employment data will be released on Wednesday, Thursday and Friday as well, which may move the markets lower depending on how strong they are.

“High employment rates have been a real sticking point for the Fed as it serves to keep inflation elevated,” Mary Ellen said. “Should we see a pullback, the 10-day moving average is the next area of possible support for both the Nasdaq and S&P 500.”

Do earnings reports show uptrend?

Traders have been looking for some relief from a see-saw stock market and the rally last week was a welcome change after a tough February.

“The gains were broad based so that every non-defensive sector was positive for the week which in turn, improved breadth in the markets,” Mary Ellen said. “Most impressive was that stocks rallied despite elevated interest rates and stronger than expected growth in the services sector on Friday.”

This market environment has proven that traders shouldn’t get locked into an up or down shift for the long term.

“This bullish bias will be tested this week as critical employment data will be released while investors will be paying close attention to comments from Fed Chair Powell on Tuesday and Wednesday,” Mary Ellen said.

Traders must also consider the influence of earnings reports.

“Of note is that 99% of companies within the S&P 500 have reported their fourth quarter earnings,” Mary Ellen said. “Price jumps in companies that came in above estimates have been a big driver of individual stocks as well as group movements higher. That said, positive investor sentiment has been known to drive stocks higher despite a scarcity of positive earnings reports.”

Mary Ellen is of the mindset that it would be prudent to tread into the markets slowly until further evidence of reduced inflation and economic data can support a more accommodating Fed.

For in-depth details from Sam and Mary Ellen, check out their premium reports.