Can the ASX 200 bounce after last week's brutal selloff?

The hotter-than-expected US inflation print last Tuesday kicked off a horror show for the ASX 200, wiping almost -4% in just three sessions. Prior to the inflation report, the market was on a four day winning streak, up 4.2%.

The conversation about markets has suddenly U-turned from "are we going to revisit August highs" to now "are we going to revisit June lows".

The violent selloff has pushed the market back into a rather dire place. But after such heavy selling, can it still bounce?

All eyes on the Fed

At least for this week, the market will be fixated on the Fed's interest rate decision, which will take place at 4:00 am AEST on Thursday.

The Fed is widely expected to hike rates by 75 bps and upwardly revise its median path for policy to a peak rate of 4.1% by end-2023, according to JP Morgan.

"More important than the policy action at this meeting will be the path forward. We expect Chair Powell to expand on the Committee's view that at some point ratcheting down the pace of hikes will be appropriate," the analysts said.

Interestingly, the S&P 500 has gained more than 1% on every Fed rate decision day since the hiking cycle began in March.

• 16 March +2.2%

• 4 May +3.0%

• 15 June +1.5%

• 27 July +2.6%

It seems like history holds the market in good stead, but there's no shortage of left field catalysts like a 100 bps hike or concerning forward looking commentary from Powell.

Thinking technicals

In the same way a cooler-than-expected inflation print in August inspired a massive re-rate for equity markets. The opposite is now unraveling following the scorching hot report last week.

On Monday, the ASX 200 briefly rallied 0.22% in early trade. But those gains have now faded to -0.18% at 12:45 pm AEST. It's not a good look if the market is not only struggling to bounce but also selling off intraday after such a brutal selloff last week.

It will be interesting to see if whether or not the market can hold the early September lows of around 6,730. What bulls don't want is another undercut of recent lows. But since the August top, the market has done a pretty good job of doing just that.

ASX 200 chart (Source: TradingView, Annotations by Market Index)

Following seasonality to a tee

Sentiment Trader has compiled the average historical performance of the S&P 500, which provides a good view of seasonal tendencies.

The August top into a September selloff has been spot on. The weakness has historically carried over to mid-October which then takes us towards the Christmas rally.

Source: Sentiment Trader