The Nasdaq saw a decline due to profit-taking and hedging ahead of Fed Chair Powell’s speech at the Jackson Hole Symposium. Initially, the Nasdaq was performing well after the US CPI report met expectations. However, it was impacted by unexpectedly high US PPI data, better jobless claims, and rising inflation predictions.

Speech Speculation and Market Reaction

Traders began to focus on Powell’s upcoming speech. Concerns about possible hawkish signals led to increased selling and hedging, resulting in a more pronounced market pullback. If Powell indicates that a rate cut might happen in September, it could lead to a rally as traders unwind their hedges. The Nasdaq fell back to an important upward trendline on the daily chart, where both buyers and sellers are planning their next moves. Buyers want to push towards new highs, while sellers are looking for a break below the trendline to push prices down to the 22,800 level. On the 4-hour chart, a small upward trendline was broken, which affected sellers’ actions. Ongoing defensive trading caused further declines. The 1-hour chart indicates a minor downward trendline, suggesting bearish momentum. Upcoming economic releases and Powell’s speech are likely to increase market volatility. The Nasdaq’s decline to a critical upward trendline shows that traders are reducing their risk before the Jackson Hole speech. Recent strong data, like the Producer Price Index for July rising 0.6% month-over-month and jobless claims dropping to 205,000, has raised uncertainty about the Fed’s next steps. This nervousness has led traders to take profits and hedge their positions. Market uncertainty is evident in volatility metrics. The CBOE Volatility Index (VIX) has risen from a monthly low of 14 to over 18, indicating that traders expect a larger swing in the Nasdaq in the next 30 days. A higher VIX makes buying options more expensive but also signals an expected significant market movement.

Fed Speech Impact and Trading Strategies

All eyes are on Fed Chair Powell’s speech this Friday, which could result in a swift market move. His tone will be crucial; if he suggests a September rate cut is possible, it could lead to a significant rally. Conversely, if he signals that more time and data are needed before considering a cut, the market could decline. Traders expecting a rally from this trendline might consider buying call options or call spreads on the Nasdaq 100. This strategy allows them to partake in potential gains while managing their risk. It aligns with the belief that dip-buyers will come in at this crucial technical level, anticipating a dovish speech outcome. A move above the short-term downward trendline would also support this strategy. On the other hand, traders who believe the recent high inflation and job data will push Powell toward a hawkish stance might look to buy put options. This offers protection against a break below the major trendline, potentially leading to a slide toward the 22,800 level. Such trades could benefit from increased downside movement after the speech. For traders uncertain of the direction but expecting volatility, a long straddle or strangle could be suitable. This involves buying both a call and a put option, allowing them to profit from significant movements in either direction. This strategy banks on the anticipation that the market’s expectation of a neutral, data-driven speech might not hold true. It’s essential to recall how the market reacted sharply to Powell’s hawkish tone at the Jackson Hole Symposium in August 2022, which led to a significant sell-off. This serves as a reminder that a brief but impactful speech can reset market expectations, highlighting potential downside risks. As we await Powell’s speech on Friday, today’s FOMC meeting minutes and tomorrow’s US Flash PMI and Jobless Claims data are also on our radar. These releases may cause short-term price fluctuations and potentially influence trader positions heading into the main event. Traders should prepare for volatility throughout the week, not just on Friday. Create your live VT Markets account and start trading now.

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