Stocks have dropped, benefiting the dollar. Wall Street faced a downturn, especially in tech stocks and small companies, stopping the recent upward trend as investors wait for news later in the week. The Nasdaq fell by 1.5%, erasing last week’s gains and dropping below its 100-hour moving average of 21,333, but staying above the 200-hour moving average of 21,123. It hasn’t been below both levels since April.

Market Anticipation

As the week progresses, market sentiment is cautious. S&P 500 futures decreased by 0.3%, Nasdaq futures dropped by 0.4%, and Dow futures fell by 0.2%, after a flat close in the previous trading session. European stocks are taking a defensive approach, with Eurostoxx and DAX futures both down by 0.6% as they prepare for today’s trading. In the foreign exchange market, the dollar remains stable, with minor fluctuations except for a drop in the New Zealand dollar due to a more dovish stance from the RBNZ. Important events today include the UK CPI and Fed minutes, but everyone is watching for Fed Chair Powell’s speech at Jackson Hole. With caution settling in, we see signs that the recent upward momentum is slowing down. The Nasdaq falling below its 100-hour moving average signals a technical warning. This suggests that in the coming weeks, we should think about hedging long positions or bracing for a possible downturn.

Fed’s Stance and Market Reaction

Market jitters are understandable, as new US CPI data showed inflation rose to 3.4%, slightly above expectations. This adds pressure on the Federal Reserve, making Chair Powell’s upcoming speech at Jackson Hole crucial for market direction. We are preparing for the possibility that he may indicate a “higher for longer” approach to interest rates. Due to this uncertainty, implied volatility is increasing, with the VIX rising to 19.5, its highest in three months. This situation is perfect for strategies that benefit from large price changes, like buying straddles or strangles on indices such as the SPX. These strategies can profit whether the market moves sharply up or down after the Fed’s announcement. For those with significant tech investments, the Nasdaq’s decline is concerning. We are purchasing put options on the QQQ ETF as a direct hedge against further drops in tech stocks, which provides clear downside protection if the market reacts negatively to Powell’s remarks. The dollar’s strength is another noteworthy trend, serving as a safe haven during market uncertainty. We are considering call options on dollar-tracking ETFs like UUP to take advantage of the ongoing risk-off sentiment. A hawkish tone from the Fed could speed up this trend. We recall how Chair Powell’s brief and straightforward speech in August 2022 led to a sharp market sell-off by reaffirming the Fed’s commitment to fighting inflation. The memory of that event keeps us cautious. We believe it’s wise to prepare for a similar reaction this time. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now