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Fed Remains Dovish: Is It a Buy Signal or Time to Take Profits?

The S&P 500 continues to hover near its highs after the Fed keeps rates steady and remains dovish. Is that a buy signal or is it time to take profits?

Stocks came into Wednesday riding a strong trend, with the Dow Jones Industrial Average, S&P 500 and Russell 2000 all recently hitting all-time highs.

The notable laggard of the group has been the Nasdaq, as tech stocks continue to struggle against a backdrop of higher interest rates.

Those rates continued higher again on Thursday, and even though the post-Fed reaction was decisively bullish on Wednesday afternoon that reaction hasn't carried over to the stock market on Thursday.

The question now: Are stocks a buy after the Federal Reserve’s announcement?

After the Fed’s update, investors now know it plans to remain accommodative with its fiscal policy and doesn’t plan to raise interest rates anytime soon. That’s not exactly a secret at this point, though.

On the plus side, the Fed sees a better-than-expected recovery in GDP growth this year and in the future.

So more specifically we must ask if this is weakness that should be bought?

Trading the S&P 500

Daily chart of the S&P 500 ETF (SPY).

Daily chart of the S&P 500 ETF (SPY).

For accessibility purposes, let’s look at the SPDR S&P 500 Trust ETF  (SPY)  instead of the futures or the index.

Let’s keep in mind, the SPY rallied in five of six trading sessions ahead of the Fed’s announcement, as well as in six of eight sessions in which the stock rallied about 6.5% off the recent low.

For an index this size, that’s no small move. However, it wouldn’t be unhealthy for the market to pull back a bit after such a rally - even though the Fed remains dovish.

The wild card here is interest rates. If rates continue higher, it’s going to make life tough for the bulls. Not that stocks will necessarily cascade into a bear market because of it, but ultimately it could make it difficult to sustain any sort of meaningful rally and could ultimately pressure the market lower. 

The SPY is holding up nicely over the 10-day moving average and the $392 level. The longer that remains the case, the better case the bulls have for a move to and eventually through $400.

However, a break of those levels will not be the end of the world. We still have decent support at the 50-day moving average, with the $372 level and 100-day moving average in play below that.

Should it hit $372 again, that would be a pullback of roughly 6.5% from the highs. That's hardly the hallmark of panic. 

On a move above $400, let’s look for a push to $408, then potentially $414. The latter is the long-term 161.8% extension from the Q1 2020 trading range.

So long as the S&P 500 is above its 50-day moving average, this tape remains bullish. Below the 50-day and there could be some weakness, but we’re still a long way from reversing the current trend.