The bulk of third quarter earnings were reported over the past two weeks. Many stocks, particularly tech stocks, fell sharply on above average earnings and guidance. Consequently, the stock market was more predictable than many individual stocks. SPX, for example, generally traded within 1,170 and 1,200, i.e. multi-year support at 1,165 and the 200 day MA at 1,200. Also, the economic data reported Friday showed real GDP expanded at a 3.8% annual rate during the third quarter. So, there was no "soft-patch" afterall.

However, the market continues to worry about inflation. The GDP Chain Price Deflator, also reported Friday, rose at a 3.1% annual rate during the third quarter, which was much higher than the 2.6% rate reported for the second quarter. Recently, the market has been fearful that the FOMC will continue to tighten the money supply well into next year. On Tuesday, the FOMC is expected to raise the Fed Funds Rate another 25 basis points to 4%. That would add up to 300 basis points of hikes (25 basis points at each meeting) over the past 16 months.

The chart below is a Nasdaq weekly chart. Nasdaq has been creating a rising wedge for about two years. The MACD indicator has been moving in the opposite direction of the price chart (i.e. negative divergence). The three highs in the wedge fit well. However, it's uncertain if the third low will also give a good fit. The wedge is compressing, which should continue to generate volatility. Many intermediate-term technical indicators, e.g. NYSE Summation Index, NYSE Oscillator MAs, CBOE Put/Call, etc., suggest the market will be higher sometime within the next few months.

It's possible, the market will fall shortly after the FOMC announcement Tuesday for a better opportunity to buy before a multi-month rally. Also, there may be excellent opportunities to sell, for large gains, taking advantage of trading ranges and volatility. The Nasdaq Rising Wedge and the SPX multi-year support and resistance levels, between 1,165 and 1,250, can be used together for general buying and selling points. However, it's also possible the market will continue to trade well within these ranges for some time with greater volatility. Nonetheless, I believe, there will be many excellent short-term and intermediate-term trading opportunities over the next few months.

Charts available at PeakTrader.com Forum Index Market Overview section.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.

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