Connecting the dots, how market participants interpreted yesterday’s FOMC meeting

What originally drew me to technical analysis was the purity of mathematics. The use of mathematics in technical analysis to forecast market sentiment, while not always correct, it is a very black and white process.

A technical formula can indicate whether a market is oversold or overbought, and although it cannot predict a reversal the information derived will always contain the same meaning. In technical indicators such as the RSI (relative strength index), or stochastics have a defined and precise number that can indicate if a market is oversold or overbought.

It is a well-accepted fact that fundamental events that cause changes in market sentiment. These shifts in sentiment impact the price of a stock or commodity. However how the changes in market sentiment effect market prices cannot be viewed in black or white due to the human element. Simply put it is hard to predict how investors will react to fundamental events.

This can clearly be seen in how market participants reacted to the information released by the Federal Reserve yesterday through a written statement and press conference held by Chairman Jerome Powell.

Prior to this week’s FOMC meeting Bloomberg polled 31 economists. Their predictions were spot on. Collectively the economists came to the following conclusion; “The Federal Reserve may hold interest rates near zero for three or more years, and its balance sheet will soar above $10 trillion as policymakers seek to revive the U.S. economy from recession.”

The economic analysts were 100% correct in their predictions about interest rates. The Federal Reserve maintained and acknowledged their commitment to keeping interest rates near zero for an extended period of time. However, the reaction by market participants that took both gold and silver prices dramatically lower was the opposite of what one would expect to occur.

Both gold and silver traded lower on the day with gold futures basis the most active December contract losing approximately $19, and spot gold declining by approximately $15. These losses were tempered slightly by dollar weakness which lost -0.33%.

According to an article penned by Myra P. Saefong and Mark DeCambre in MarketWatch, “Although that scenario may prove bullish for gold over the long term, some experts said that investors may be selling gold because the moves by the Fed weren’t more demonstrably dovish by offering fresh policy measures, deflating some of the enthusiasm for owning bullion over the near term.”

There article also cited Craig Erlam, senior market analyst at Oanda saying, “The yellow metal rallied into the Fed meeting and those positions quickly unwound as it became clear that the bazooka wasn’t making an appearance. The Fed probably lived up to the lower end of expectations but all that gets you is a healthy dose of profit taking.”

While the explanations listed above are certainly part of the reason that we saw gold and silver pricing trade lower, it does not fully explain why fundamental news that should have been interpreted as extremely bullish caused a price reversal in the precious metals.

Wishing you as always, good trading and good health,