The Federal Open Market Committee (FOMC) issues its next interest rate decision on Wednesday afternoon, with Wall Street analysts expecting the governors to reiterate a patient approach to U.S. economic growth. It's hard to tell how stock and futures markets will react if there are a few surprises, given overbought technical conditions in place following a healthy three-month advance off December's deep lows.

Three securities could offer important clues about price direction after the release. Banking, precious metals and cyclical plays tend to exhibit greater sensitivity to Fed policy than many growth sectors, so it makes sense to focus attention on major exchange-traded funds (ETFs) for those segments or key components that dictate broad sector direction. Of course, tape reading is more art than science, and other groups may deserve a look as well, especially if the Fed tosses a few curve balls.

Technical chart showing the share price performance of JPMorgan Chase & Co. (JPM)

Dow component JPMorgan Chase & Co. (JPM) holds the highest capitalization among commercial banks at $35.5 billion and should attract the initial flow of speculative capital if banks are destined to head higher after the decision. The sector has bounced back from a miserable 2018, buoyed by the Fed's flip-flop on interest rates and the prospect of a U.S.-China deal that slows or ends the slide in U.S. economic growth.

Chase stock has led the banking sector through most of the decade but has struggled since hitting an all-time high near $120 in February 2018. It fell to a 52-week low in December but has gained more than 15 points since that time and is now trading above the 200-day exponential moving average (EMA) for the first time in more than three months. Smart traders will be watching the moving average this afternoon because the stock has been testing that level since February.

Technical chart showing the share price performance of the SPDR Gold Trust (GLD)

The SPDR Gold Trust (GLD) has been on the move since turning higher at a 19-month low in August 2018, benefiting from rising inflation and the dovish twist in Fed policy. The fund and commodity topped out in 2011 and entered a long-term downtrend that finally bottomed in the fourth quarter of 2015. Price action in the past three and a half years has been stuck within the 31-point trading range carved between December 2015 and July 2016.

A five-year trendline of lower highs has denied four breakout attempts through April 2018. The fund entered a fifth attempt in February 2019 and reversed once again, dropping back to the 50-day EMA. It has bounced off that support level, and a rally after the rate decision could signal the start of a sixth attempt. Conversely, a decline through the March low would support bearish positions due to higher odds for continued downside into the 200-day EMA at $120.

Technical chart showing the share price performance of the SPDR S&P Retail ETF (XRT)

The SPDR S&P Retail ETF (XRT) documents the rise and fall of customer buying pressure and its overriding impact on U.S. economic growth. The fund fell to 2013 support in the upper $30s for the third time in December, completing a bearish pattern that raises the odds for an eventual breakdown and long-term downtrend. It has bounced strongly in the first quarter, lifting back to the 200-day EMA and midpoint of the five-year trading range, where it stalled earlier this month.

This positioning predicts the next price swing will be significant, with a downturn unlikely to stop at December support while a rally opens the door to a third trip into range resistance in the $50s. Bears currently hold the advantage in this bilateral scenario for three reasons. First, buying power off the low shows minor improvement in depressed accumulation-distribution readings. Second, the ETF has failed four attempts to mount the 200-day EMA since October 2018. Third, weekly relative strength oscillators are now fully engaged in sell cycles.

The Bottom Line

Informed market players will be watching banks, precious metals and cyclical stocks to gauge the impact of the latest Federal Reserve decision.

Disclosure: The author held no positions in aforementioned securities at that time of publication.