Fed Decision Could Signal Turning Point in Fourth Quarter Rally

The Federal Open Market Committee (FOMC) lowered interest rates by a quarter point on Wednesday afternoon, as expected, while Chair Jerome Powell told a press conference that rate cuts were done for now. The mixed news triggered an initial sell-off that was bought quickly, yielding a strong uptick into the closing bell. The S&P 500 and the Dow Jones Industrial Average posted bullish outside candlesticks that reflect a modest triumph of bulls over bears.

Gold surged on the news, with the headwind of lower rates taken off the table for now. This could generate an intermediate bottom for the yellow metal while setting the stage for another trend advance. Banks went in the other direction, dumping sector indices to intraday lows in a reversal that could presage tougher times for the group in coming weeks. And most importantly, bonds surged higher, signaling a potential bottom after a modest pullback off August's multi-year high.

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

The SPDR Gold Trust (GLD) topped out at $186 in 2011 after a multi-year uptrend and sold off to $100 in 2015. Price action posted a long series of lower highs between 2013 and 2018, carving a trendline that was mounted on high volume in June 2019. The subsequent uptrend stalled in August after crossing the 50% sell-off retracement, giving way to an intermediate correction that's been testing support at the 50-day exponential moving average (EMA) for the past six weeks.

The fund bounced at the moving average once again after the Fed decision, posting a bullish outside day that may complete the next stage of a bottoming pattern. The weekly stochastics oscillator entered a buy cycle last week, predicting relative strength that could last into year end. This tailwind may support a test at the summer high and a breakout that will face heavy resistance between $150 and $155. 

Chart showing the share price performance of the SPDR S&P Bank ETF (KBE)

The SPDR S&P Bank ETF (KBE) sold off from $60 into the single digits during the 2008 economic collapse and turned higher into the new decade, carving a shallow uptrend that stalled at the .786 Fibonacci sell-off retracement level in January 2018. It completed a topping pattern at that level and broke down in October, dumping to a two-year low in December. The bounce into 2019 stalled in the mid-$40s in March, yielding three failed breakout attempts into this week's rate decision.

The fund reversed at resistance for the fourth time in Wednesday's session, but greater downside is required to confirm another failed breakout attempt. The ETF is trading lower once again on Thursday morning, but sell signals will need to wait until a decline breaks the 200-week EMA at $41.75. Downside could escalate quickly if that happens, bringing the August low in the upper $30s into play.

Chart showing the share price performance of the iShares 20+ Year Treasury Bond ETF (TLT)

The iShares 20+ Year Treasury Bond ETF (TLT) entered a broad rising channel after posting a new high in 2008, with 2012, 2015, and 2016 rallies ending at channel resistance. The fund mounted the 2016 high in August 2019 and reversed a few weeks later, prior to reaching that contested level. The intermediate correction into late October has been testing the breakout level through a diagonal pattern that's still in progress.

The weekly stochastics oscillator is engaged in a complex sell cycle that began in early September and still hasn't crossed into the oversold zone, indicating that bears remain in charge after the Fed meeting. However, the fund posted the strongest rally in four weeks after the news, suggesting that short-term support at $137 will hold and provide a trading floor for new long positions in coming weeks.

The Bottom Line

Rate-sensitive instruments took notice of Chair Powell's decision to stop rate cuts for now, with gold and bonds rallying strongly while banks sold off. This price action could signal a major turning point in the fourth quarter rally.

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.

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