In our last Quick Market Recap we urged traders to remain cautious on the possible whipsaw that may occur in this market. See snippet of our post below
The market pulled back over 3.5+% since then. Despite this, we believe the Federal Reserve meeting should provide some context for the market to adjust interest rate and balance sheet expectations heading into the new year. This FOMC meeting is an ideal opportunity to paint a clearer picture of how they intend to manage the inflationary pressures that have persisted throughout the year. The bullish seasonality and end of year tax selling has paved the way for enough market participation to prevent a significant sell off. So what are the scenarios we will be looking to play out now? Scenario 1: The market produces a significant bounce after the statements by the Fed and sustains this bounce into the new year as a seasonal "Santa Clause Rally" occurs. This is a scenario we believe has the highest probability of playing out.
Scenario 2: We get a wash out low to form prior to a continued rise in price. As you can see by the candle patterns this scenario has played out thus far. Despite this, seasonality and recent equity activity have suggested scenario 1 is more apt to play out.
Either way, this period has shown that traditional volatility has finally arrived. The best manner to play increased volatile periods is to reduce position sizes, be defensive using stop loss triggers and wait until you begin to observe more follow through in many of the names that you play long or short.
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