Ahead of the last meeting of the Federal Open Market Committee (FOMC) in 2022, the stock market rallied on Monday to move past one of the worst weeks since September.

This week is setting up as a volatile chop fest for retail traders with consecutive days of economic data releases and the impending central bankers meeting.

The FOMC meets Wednesday with an expected benchmark interest rate hike announcement in mid-afternoon followed by a press conference with Federal Reserve (Fed) Chairman Jerome Powell.

And market participants must wade through the U.S. Consumer Price Index (CPI) on Tuesday; jobless claims and retail sales reports to open the trading session Thursday; and finally the S&P Purchasing Managers Index (PMI) for manufacturing and services after the opening bell on Friday.

Stock market rallies ahead of Fed rate hike

The team at Simpler Trading is sticking to short-term setups to get through the wave of news event influences this week.

Fed actions on Wednesday are weighing heavily on traders’ plans.

“The bias for me will only be day trading as the push/pull dynamics into the event are very high and will likely make for sloppy swing trades,” said Sam Shames, Vice President of Options at Simpler Trading. “This last Fed meeting of 2022 is setting up to be one to remember.”

“It seems unlikely anything interesting happens until Fed on Wednesday,” said Sam. “The risk to the downside is quite large if Powell doesn’t deliver.”

The stock market took advantage of the lull on Monday as all three major indexes – Dow, Nasdaq, S&P 500 – closed to the upside, compared to being down overall last week. The indexes are all down for the year with the Dow losing 7%, the Nasdaq 29%, and the S&P 500 16.5% before the uptick today.

In the market today, the Dow closed at 34,005.04 points to spike 1.58% (adding 528.58 points on the day). The Nasdaq jumped to 11,143.74 points for a 1.26% gain while the S&P 500 climbed 1.43% to 3,990.59 points.

As the news events play out this week, Sam is watching the S&P 500 (SPX) for price action at key levels.

“Once we have clarity on whether the market wants to hold SPX 3,900 as support or break 4,030 as resistance, that wave likely carries things into the next year,” Sam said.

Fed actions on Wednesday will affect market momentum one way or the other.

The FOMC, or central bank, is expected to raise benchmark interest rates by 50 basis points (bps). The central bank has raised rates by 75 bps at each of its previous four meetings.

Despite hawkish Fed rate hikes, recent economic data shows inflation hovering stubbornly high above 7% annually after declining from above 8% in recent months. Whether inflation has peaked or not, core inflation is still more than double the Fed target.

Core inflation is the measure for how aggressively the Fed continues raising Federal funds interest rates. The Fed has staunchly touted for months its aggressive resolve to lower annual core inflation down to 2%.

Simpler’s traders aren’t getting aggressive in this uncertain environment.

“Essentially, with markets being at resistance levels with relatively stretched

internals, heading into a major catalyst event like a Fed rate decision is the very definition of

when we should be max cautious,” Sam said.

“We must always ask ourselves, ‘What is the risk to reward of this moment?’”

Growth stocks need boost to sustain rally

After the beating the stock market took last week, “caution” is the safe word at the moment for retail traders.

This week any one of the upcoming economic news events could erase the market-wide rally today.

“Last week’s trend lower was based on fears that we may be headed for a recession,” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading. “This is a message that the bond markets have been sending for some time with its inverted yield curve. In turn, investors put funds into more defensive areas of the market while exiting growth stocks which traded lower.”

Mary Ellen sees a need for growth stocks as key for any rally to experience a more sustained upward move.

This upcoming week may prove pivotal for the markets, Mary Ellen said, as the inability of the S&P 500 to hold above its 200-day moving average has pushed volatility indicators into negative territory.

“Further deterioration may push this index below its 50-day moving average which in turn would end the current bear market rally,” Mary Ellen said.

She noted how the current bear market rally has been fueled primarily by companies that reported earnings above estimates or where management guided estimates higher.

“Earnings season is all but over now, which puts even more weight on key data such as CPI and Fed Chair Powell’s comments after the FOMC meeting,” Mary Ellen said.

Given the uncertainty surrounding the markets this week, Mary Ellen plans to refrain from putting new money to work at this time and wait for the market to reveal what lies ahead.