Market movers
At the beginning of last week, investors largely ignored consumer inflation and manufacturing data (CPI and PPI). However, on the bond market, there was a flattening of the yield curve due to discounting a less accommodative FED and not a premature start of tapering.
In a statement released by Chairman Jerome Powell during his testimony before the House Financial Services Panel this week, he acknowledged that not only inflation is higher than the Federal Reserve expected but also added that, “inflation … is likely to remain elevated in the coming months.”
Many investors were concerned that higher inflation numbers would lead to action by the Federal Reserve to slow its dramatic rise. Contrary to expectations, Chairman Powell said it would be a “mistake” for the Fed to “act prematurely” and combat inflation which should ultimately be transitory.
How long can markets ignore this data? Expected inflation averages 3.6 percent over the next 3 years. The word “tapering” has now entered the markets and it is mandatory to be vigilant because corrections can come at any time this summer.
The coming week agenda is light with macroeconomic data but it remains very interesting both for the continuation of the US quarterly reports season with the publication of the accounts of the big US groups (IBM, Netflix, Johnson & Johnson, and Intel) and for the ECB Governing Council meeting. After the release of the strategy review, Governor Christine Lagarde will have to provide further details with possible changes also to the forward guidance.
Analysis of the week and scenarios for DAX and Dow Jones
The bullish setup of the last weeks saw the formation of bearish swings between Thursday and Friday. Unless the markets recover in a V-shape, it is highly likely that we will see a strong sell off this week. A possible scenario for this week might be a rebound and the formation of a high between Monday and Tuesday followed by a possible decline until Friday. Monday and Tuesday could be the days when we can see a change in the scenario.
DE30 – The Dax attempted to break the historical highs at 15,800 last week. By Thursday, the index had a net reversal and lost around 300 points stabilizing in the 15,501 area.
If the German index will not recover 15,681 quickly, any rise should be seen as a pullback and therefore as a possibility of new short entry. Above 15,578 and up to 15,631, price may try to push upwards but the same applies as before. Without a V-reversal, price will continue its bearish direction.
The weekly trend might turn bullish again if the price stabilizes on Friday’s close around the 15681 area. However, in order to have a chance of new all-time highs, price will have to break to the downside 15,794. The first target for the year is placed around the 15,900 area, but the real goal is to reach the 16.000-16,200 area.
Key support can be found at 15,464. Below it, we do not have relevant support until 15,386-15,311-15,269 area. Key area for maintaining bullish strength can be seen at 15,209. All prices might be good entry levels.
Supports in the area 15,119-15,062-15,043 can be weak after the rise of mid-May. Below them, a vertical fall would be interpreted as a probable new downtrend. We always watch the volumetric supports 15,017-14,981 and 14,842-14,804. The loss of these last two areas opens to new lows with first target in the area 14,600-14,441.
US30 – Inflation issue weighs heavily on the Dow Jones index. Value stocks can be heavily sold in case of a confirmation of tapering so the index can suffer violent falls.
Prices did not reach new all-time highs last week by a whisker and turned downwards in Thursday’s session closing Friday with a loss of more than 400 points from the high.
The Dow is not yet positioned in a potential bearish reversal. However, the coming week will be crucial to understand if this movement will be just a pullback or will open a deeper fall.
The trend might turn bullish again if prices recover and hold the resistance 34,846-34,935. If this happens, we could see a new attempt to rise to 35,000 points and then aspire to new all-time highs in the 35,500-36,000 area.
If prices fail to break 34,846-34,935 resistance or remain below 34,717, we may see a potential target at 34,570-34,395 weekly support, a level which has seen violent pullbacks to the upside at each breakout attempt in the second week of July. Key support can be found at 34,307 as it has been touched several times without achieving continuity in the price falls. Next support is around the 34,134-34,015 area.
The key support placed between 33,980 and 33,823 is confirmed. The area corresponds to the resistance of two weeks ago and it is well bought. However, only with a significant increase of volatility and continuous vertical falls of the price can we fathom a possible a change in the trend. The reason is related to the selling climax of mid-June where purchases clearly marked the trend.
Some important bearish signals might come if the price goes below 33,686. A key level can be seen at 33,608 with following support at 33,215 and confirmed at 32,956. The latter should be monitored as its loss could lead to fast and new bearish pressures.
New entry levels for buying positions might be seen in the 32761-638 area and at 32,308. The strong buying zone created weeks ago at 32,308-32,137 is confirmed. Only below this area we can see stronger bearish pressures with possible weekly trend changes.
IMPORTANT NOTE: The markets are starting to show some volumes and good bearish pressure. The ideal scenario could be to wait for intraday pullbacks and look for short positions if the prices do not recover the indicated resistance levels. The target of the S&P500 index was almost reached but a strong reversal materialised so caution when buying is a must.
Also, this week, it is wise to take note of Monday’s openings and Friday’s closings in order to confirm or deny the current trend. Avoid overtrading and keep an eye on the volatility impressed by HFT. Mark any gaps that may appear during the week with particular attention to those of Monday.
Have a good trading week!
Research provided by Giancarlo Prisco
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