The Dow Jones industrial index continued to decline in its recent trades,registering record losses for the third session in a row. The index fell by 0.47 percent, losing about 154.02 points and settling at the end of trading at the level of 32,909.60, after falling by 1.91 percent on Monday.

New home sales in the United States fell by 12.6 percent, settling at the seasonally adjusted rate of 511,000 homes in July,  after being at 585,000 homes in the previous month according to data released by the Commerce Department on Tuesday. Analysts polled by the Wall Street Journal expected new home sales to reach 574,000 homes in July.

The S&P Global US manufacturing PMI fell to 51.3 in August after being at  52.2 in July, a 25-month low, while the services PMI fell to 44.1 in August from 47.3 in July, well below the 49.8 that the analysts expected.

Stocks fell in the final sessions ahead of this week’s annual central bank meeting in Jackson Hole, where Federal Reserve Chairman Jerome Powell is expected to reinforce a strong commitment to ending an inflation that has hit four-decade highs.

Traders are now divided between expecting a 50 basis point interest rate hike and a 75 basis point hike by the central bank, after many policymakers recently disputed the bearish outlook and reaffirmed the Fed’s commitment to fighting inflation.

Dow Jones Technical Outlook

The index continues its decline along a main downward trend line in the medium term, as shown in the attached chart for a period of time (daily). The continuation of the negative signals in the relative strength indicators causes the index to stabilize in its recent trades below the main resistance level of 33,000. We observe the continuation of the positive pressure for its trades above the simple moving average for the previous 50-day period.

Our expectations point to the continued bleeding of losses for the index during its next trades, especially as long as it remains stable below the 33,000 level, to target the pivotal support level of 32,272.65.

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The Dow Jones Industrial Average saw its biggest one-day, pips, and percentage loss since June 16th.

The Dow Jones Industrial Average closed sharply lower during its recent trading at the intraday levels, to record losses for the second consecutive session, by -1.91%. The index lost about -643.13 points and settled at the end of trading at the level of 33,063.62, after its decline in trading last Friday by -0.86%. It ended the week’s trading with a decrease of -0.16%.

The Dow Jones Industrial Average saw its biggest one-day, pips, and percentage loss since June 16th, as investors remained concerned about the possibility of another aggressive rate hike.

Federal Reserve Chairman Jerome Powell and other central bank officials and policymakers will gather this week at the annual Jackson Hole event. Powell is due to deliver a speech on the economic outlook on Friday, and investors will hear any indication of whether a 50 basis point or 75 basis point increase is likely at the September FOMC meeting.

The probability of the Fed raising rates by 75 basis points to a range of 3% to 3.25% increased to nearly 54% as of Monday, compared to 47% on Friday and 39% a week ago.

Investors will also be looking for details about the Fed’s plans to cut its roughly $9 trillion balance sheet, a process that began in June.

Dow Jones Technical Outlook

• Technically, the index previously faced a strong resistance represented by a bearish trend line in the medium term.
• This is shown in the attached chart for a (daily) period.
• This coincided with the start of negative signals on the relative strength indicators, after they reached at the same time overbought areas.
• It caused increasing pressure on the index to break in its recent trading the 33,240 support level.

All of this comes in light of the dominance of a bullish corrective wave in the short term, supported by its continuous trading above its simple moving average for the previous 50 days. It represents the last stronghold of support that could gain it the necessary positive momentum and give it the ability to regain its recovery.

Therefore, given the index’s stability below 33,240, we expect it to decline further during its upcoming trading, to target the support level 32,273.

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The Dow Jones Industrial Average declined during its recent trading at the intraday levels, to record losses in its last sessions, by -0.86%, to lose the index towards -292.30 points. It settled at the end of trading at 33,706.75, after it slightly increased during Thursday’s trading by amounting to 0.06%. The index ended the week declining by -0.16%.

Louis Fed President James Bullard is open to the idea of ​​another massive interest rate hike at next month’s central bank meeting, the Wall Street Journal reports. “We must continue to move quickly to the level of the policy rate that will put significant downward pressure on inflation,” he said, and “I don’t really understand why you would want to drag the rate increases into next year.”

The Federal Reserve raised its benchmark overnight interest rate by 225 basis points since March to fight inflation that has reached its highest level in four decades.

The focus next week may be on Federal Reserve Chairman Jerome Powell’s speech on the economic outlook at the annual conference of global central bankers in Jackson Hole.

Dow Jones Economic News

A survey from the Bureau of Labor Statistics showed that the unemployment rate fell in 14 states in July, rose in three states, and stabilized elsewhere. The national unemployment rate fell to 3.5% in July from 3.6% in June, marking the lowest level since February 2020 just before the pandemic began. Nonfarm payrolls nationwide increased by 528K jobs in July after increasing 398K jobs in a revised reading in June.

Technical Outlook

Technically, the index’s decline came as a result of the stability of the important resistance level 34,118.

• This is the resistance that we had referred to in our previous reports.
• The index is trying to reap the profits of its previous rises, and it is also trying to gain positive momentum that may help it recover and penetrate that resistance in the future.
• It is also trying to drain some of its saturation of the clear buying of the relative strength indicators, especially with the influx of negative signals from them.

All of this comes because of the continuation of the positive support for its trading above its simple moving average for the previous 50 days. In addition, it is being affected by leaving the range of a descending price channel that was limiting its previous trading in the short term, as shown in the attached chart for a (daily) period.

Our expectations suggest a return to the index’s rise during its upcoming trading, especially throughout the stability of the support level 33,240, to target again the resistance level 34,118 in preparation for attacking it.

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The Dow Jones Industrial Average declined during its recent trading at the intraday levels, to break with a series of gains that continued for five consecutive sessions. It recorded losses in its last sessions by -0.50%, to lose the index towards -171.69 points. It then settled at the end of trading at 33,980.33, after rising in trading on Tuesday, by 0.71%, to reach this rise to its highest level since late April.

Minutes released from the minutes of the Federal Reserve’s July meeting showed that members of the Federal Reserve’s Monetary Policy Committee decided at their meeting last month that they would continue to increase benchmark lending rates until inflation fell significantly. They are using incoming macroeconomic data to determine how high rates will go.

In an effort to combat hot inflation, the Federal Open Market Committee has raised interest rates at each of its meetings since March, including two back-to-back increases of 75 basis points at its last two meetings, with more increases expected in upcoming meetings. However, despite these measures, inflation remains at its highest levels in four decades.

Economic Outlook

US retail sales were flat in July, less than an expected 0.1% increase in a Bloomberg poll and after a 0.8% rise in June. However excluding a 1.6% drop in auto sales, retail sales rose 0.4%, compared to an expected drop of 0.1%. Gas station sales fell 1.8% in July, due to lower prices.

Dow Jones Technical Forecast

• Recent decline in the index came as an attempt to reap the profits of its recent rises.
• It is also trying to drain some of its clear buying saturation with the relative strength indicators.
• This is especially with the start of negative signals from them, to gather its positive forces that may help it recover and rise again.
• The index has helped in the resistance level 34,118 to remain intact.

Continued positive support for its trading above its simple moving average for the previous 50 days is being affected by the earlier exit from the range of a bearish corrective price channel that had limited its trading before in the short term, as shown in the attached chart for a (daily) period.

Therefore, our expectations suggest a return to the index’s rise during its upcoming trading, but it must first cross the resistance hurdle 34,118, and then target the resistance level 34,821 immediately.

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I think this market has no idea what to do with itself.

• The NASDAQ 100 Index has done very little during the trading session on Friday, as the market quite frankly looks like it’s got nowhere to be.
• I anticipate that we have a scenario where you will probably have to wait for some type of catalyst.
• Next week will probably be the next catalyst, as it has the Jackson Hole Symposium where central bankers will be able to bloviate, and probably say the wrong things causing quite a bit of chaos in the market yet again.

Hawkish Federal Reserve

It’s somewhat amazing that the market is convinced that the Federal Reserve is going to have to get loose with its monetary policy while at the same time the Federal Reserve is doing the exact opposite. This is a very confusing time to be trading, so if you have been struggling, do not be too hard on yourself. This is a rally that’s been very difficult to get behind, but it is because interest rates have been dropping. Keep in mind that over 70% of all volume in New York now is machine trading, so if the rates are dropping, the machines are buying stocks.

This is especially true as of late, and it’s almost impossible to trade without paying close attention to the bond markets. Quite frankly, it’s all about the bond markets right now, and nothing to do with anything else. There are only a handful of stocks that move the NASDAQ 100, see need to keep that in the back of your head as well. It’s all the usual suspects such as Amazon, Tesla, Alphabet, Microsoft, etc.

We are sitting just above the 200 Day EMA, which should be a potential victory for the bulls, but we haven’t necessarily taken off either. In other words, I think this market has no idea what to do with itself. In the video, I will show you the yields on the 10-year note to give you an idea as of the correlation currently, and how this is all about whether or not Uncle Jerome is going to give Wall Street their sugar high. The Federal Reserve has done this for 14 years and now has to deal with impetuous children. Now that the Federal Reserve governors are no longer day trading, they have no real need to goose Wall Street. In other words, I think we’re going to see more chaos before we see less.

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If we break above the highest of the trading session on Tuesday, then we continue toward the 4500 level.

• The S&P 500 index did very little during the Friday session other than frustrate traders.
• The market look like it was going to fall out of bed, only to turn around and settle on a slightly positive day.
• The hammer does suggest that there is still quite a bit of buying pressure here, but quite frankly can be interesting to see how Friday plays out as there are a lot of options coming due.

Noisy Behavior Ahead

The market will continue to see a lot of noisy behavior more than anything else, so you will need to be cautious about your position sizing. Quite frankly, I did have a major problem getting a handle on the overall market during the day, as it was one of those days that you are generally better off sitting out. That being said, I do think that a market is more likely a place where you have to let it prove itself. We have had a massive rally, and it’s difficult to get overly excited about a market that has shot straight up in the air. A lot of people out there believe that the Federal Reserve is going to step away from quantitative tightening, while the Federal Reserve swears up and down it’s going to do it. In this scenario, somebody is going to lose, and my suspicion is this going to be the American public.

Having said that, it looks to me like the markets have nowhere to be in the short term, and therefore you have to look at it through the prism of a grind until we get to next week. As soon as we get the next week and get central bankers bloviating about what they are going to do to fight inflation, that’s when momentum picks back up again. There have been a lot of people out there reading dovishness coming out of the Federal Reserve, while there have been several counterbalancing that suggest that they “misunderstood the Fed.” This has been the game that the Federal Reserve’s been playing for 14 years, and now that they are no longer day trading the stock markets, it’ll be interesting to see whether or not they feel the need to save Wall Street as their interests don’t necessarily line up anymore. If we break down below the bottom of the candlestick for Friday, we will probably go looking to the 200 day EMA for support. If we break above the highest of the trading session on Tuesday, then we continue toward the 4500 level.

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We have a lot to look at when it comes to this chart, so keep your position size tight, but it’s likely that we will see buyers.

• The German DAX Index rallied significantly on Tuesday to break through a short-term resistance barrier.
• The market is closing near the €13,922 level and has cleared the gap that I have marked on the chart.
• Furthermore, we have just wiped out the 61.8% Fibonacci level, so it does look like the DAX may have a bit further to go.

Is Germany Headed for a Recession?

The 200-day EMA sits near the €14,500 level, so that might be a target at this point. That is a large, round, psychologically significant figure as well, which is also worth paying attention to as well. Ultimately, the DAX seems to be ignoring the fact that Germany is going to head into a massive recession, but it is also possible that the traders in Germany are looking at the possibility of the ECB becoming as loose as possible. That is a very real possibility due to the fact that the economy is going to get so wrecked that it’s possible that the ECB will of course have to loosen monetary policy, and traders will celebrate the bad news like they do in New York.

Looking at this chart, you can also make an argument that if we were to turn around at this level and break down below the €13,600 level, the DAX could start to sell off again, perhaps looking to reach down to the 50-day EMA. We are still very much in a downtrend, but the move on Tuesday certainly suggests that we have a huge fight on our hands. The market has shown itself to be extraordinarily resilient, so it’s perhaps a situation where we make it a little bit of a pullback, as we are overbought. However, if we break above the top of the candlestick for the trading session on Tuesday, it’s likely that we will continue to see momentum.

It’s likely that if other stock indices in the world start to fall off, the German index will almost certainly fall right along with it. The volume is starting to decline a bit, so you can make that argument as a negative sign as well. We have a lot to look at when it comes to this chart, so keep your position size tight, but it’s likely that we will see buyers.

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It’s very difficult to trade other than to simply “chase the market.”

• The NASDAQ 100 Index rallied yet again on Monday to show that the markets are ready to continue ripping toward the 200-day EMA.
• Fundamentally, there’s no reason whatsoever that the NASDAQ 100 should be powering higher the way it is, but at the end of the day, the markets have changed so much over the last 14 years that they have lost grip with economic reality.
• This should not be a surprise, because the Federal Reserve has caused this problem.

Plenty of Liquidity

Markets run on liquidity and nothing else. As long as there is going to be plenty of liquidity, people throw money at risk assets because there’s nothing else to do. Bond markets don’t pay much in yield, so they have to find a way to make money. They do this by purchasing some of the worst stocks on the planet, in what would be “good times”, and go back to the major companies in times that are a bit riskier.

Keep in mind that the NASDAQ 100 is controlled by about 7 major companies, so this is the same thing as making a bet on Tesla, Microsoft, Amazon, and a few others. This is not 100 stocks, it’s more like 7 stocks and 93 other things to look at. As long as money is going to go flying into those big companies, this market will continue higher.

Ignore the fact that the world is going into a recession, ignore the fact that a lot of pundits can pull out charts showing you just how miserable economic conditions are. Until Wall Street gets it through its head that there is a serious risk, we will continue to see more of this mentality play out. Because of this, it’s very difficult to trade other than to simply “chase the market.” In that scenario, you need to be very cautious about your position size, because someday somebody is going to look around and realize how bad the true economy is. If the Federal Reserve is in fact going to have to fight an 8.5% year-over-year inflation situation, that’s not good for stocks. However, Wall Street does not seem to know that right now, so you can’t fight the tape. It’s very likely we go looking to reach the 14,250 level over the next several days.

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Our expectations indicate the continuation of the index’s rise during its upcoming trading.

The Dow Jones Industrial Average Index continued to rise during its recent trading at the intraday levels, to achieve gains for the third consecutive day, by 1.27%. It added about 424.38 points, and settled at the end of trading at the level of 33,761.06. This came after rising during Thursday’s trading by 0.08%. Last week, the index advanced by 2.92%.

Preliminary results for August showed that the University of Michigan Consumer Confidence Index rose to 55.1 from 51.5 in July, market expectations were for a rise to 52.5, and the survey showed that the expected inflation rate for next year fell to 5%, the lowest level since February February, as energy prices continued to fall.

Meanwhile, San Francisco Fed President Mary Daly said her main issue for the FOMC meeting in September was a 50 basis point increase in the federal funds rate and was open about a big raise.

There is now a close to 56% chance of a 50bp rate hike on September 21st, while 45% of market participants are pricing in a 75bp hike.

The Bureau of Labor Statistics reported that US import prices fell 1.4% in July after advancing in June, more than economists had estimated for a 0.9% decline.

Technical Analysis

Technically, the index continues to rise, affected by its exit from the range of a descending corrective price channel that limited its previous trading in the short term, as shown in the attached chart for a period of time (daily), supported by the influx of positive signals on the relative strength indicators, despite it reaching overbought areas, as the index is benefiting from the continuous positive pressure of its trading above its simple moving average for the previous 50 days.

Therefore, our expectations indicate the continuation of the index’s rise during its upcoming trading, especially throughout its stability at the highest level of 33,240, to target the first resistance levels at 34,117.75.

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Get the Forex Forecast using fundamentals, sentiment, and technical positions analyses for major pairs for the week of August 15, 2022 here.

The difference between success and failure in Forex / CFD trading is very likely to depend mostly upon which assets you choose to trade each week and in which direction, and not on the exact methods you might use to determine trade entries and exits.

So, when starting the week, it is a good idea to look at the big picture of what is developing in the market as a whole, and how such developments and affected by macro fundamentals, technical factors, and market sentiment. Read on to get my weekly analysis below.

Fundamental Analysis & Market Sentiment

I wrote in my previous piece on 7^th July that the best trades for the week were likely to be:

• Looking for short-term short trades in the EUR/USD currency pair, which probably would not have worked well if attempted.
• Trying to exploit the pivotal point in the S&P 500 Index at 4172 if it was reached. This could have worked well by going long on Wednesday’s open above that level, which would have netted a profit of 2.10% over the rest of the week.

The news is currently dominated by the lower-than-expected annualized US inflation rate, which was released last Wednesday, showing there was no month-on-month inflation and that the headline rate has fallen from 9.1% to 8.5%. These data suggest that US inflation may have peaked, which would reduce hawkish pressures on the Fed. While a rate hike of 0.75% is still widely expected to be executed at the Fed’s next meeting, the lower CPI had the effect of weakening the Dollar and boosting riskier assets such as stocks and other currencies such as the commodity currencies.

The risk-on rally that had already been showing signs of emerging came into full bloom after the release of the US CPI data, and the week ended with the S&P 500 Index having recovered more than half its losses incurred during the calendar year of 2022.

The outlook regarding risk appetite is obviously more bullish now. The US stock market is still in a bear market, but rose again last week, although the US yield curve remains inverted. The US has seen two successive quarters of GDP contraction but is not officially in a recession. If the US is in a recession, the slowdown is very patchy so far.

To recap there were a few other important economic data releases last week. The results were as follows:

1. US Purchasing Power Index data – a month-on-month decrease of 0.5% was recorded compared to an expected increase of 0.2%. This boosted the claim that US inflation has already peaked.

2. UK GDP data: a month-on-month contraction of only 0.6% was recorded when a much heavier contraction of 1.2% had been widely expected. The leaves the quarterly contraction at only 0.1% against the expected 0.2%. However, it is widely expected that the British economic climate will continue to deteriorate over the coming months, reinforced by the Bank of England’s recent pessimistic forecast.

3. US UoM Consumer Sentiment data: consumers were more bullish than expected.

The Forex market saw a decline by the US Dollar last week. The decline was broad but especially strong against the commodity currencies, especially the Australian and New Zealand Dollars.

Rates of coronavirus infection globally dropped last week for the fourth consecutive week. The most significant growths in new confirmed coronavirus cases overall right now are happening in Barbados, Chile, Mongolia, Serbia, Tonga, and Trinidad.

The Week Ahead: 15^th August – 19^th August 2022

The coming week in the markets is likely to show a similar or lower level of volatility to last week, as the data releases due this week are light and unlikely to contain enough to news to strongly move the entire market. Releases due are, in order of likely importance:

1. US FOMC Meeting Minutes

2. UK CPI data

3. Canadian CPI data

4. Reserve Bank of New Zealand Official Cash Rate, Rate Statement, and Monetary Policy Statement

5. Australian Monetary Policy Meeting Minutes

6. US Retail Sales data

7. Australian Unemployment data

It is a public holiday in France and Italy on Monday 15^th August.

Technical Analysis

U.S. Dollar Index

The weekly price chart below shows the U.S. Dollar Index printed a bearish candlestick which closed lower, against the long-term trend, which is bullish. The overall picture technically still looks quite bullish however, as the key support level just below the 105.00 handle is clearly holding, with the recent weekly candlestick showing a long lower wick.

It will probably be a good idea to not trade the US Dollar short over the coming week until we get a daily close below 104.92 here. This is a very powerful, long-term bullish trend in the most important currency in the Forex market, and it remains likely to reassert itself despite an increasing feeling among some analysts that US inflation may have peaked.

US Dollar Index Weekly Chart

AUD/USD

Last week saw this currency pair print a large, bullish engulfing candlestick. The Australian Dollar was one of last week’s big winners as we saw risk appetite really bounce back after that lower US CPI print. The Aussie for several years now has acted as a key risk-on barometer.

Despite the strength of last week’s bullish price movement, it is far from clear what will happen next here, as the price is in area which has been quite congested recently. We also see a weak but long-term bearish trend in this currency pair which is still technically valid.

If the US Dollar Index gets established below key support this week, we might well see a further rise in price here.

AUD/USD Weekly Chart

S&P 500 Index

The S&P 500 Index is technically in a bear market, but rose last week for the fourth consecutive week, by quite a healthy amount. The price closed the week right on the top of its range at a new 3-month high. The S&P 500 Index has now recovered more than half of the total loss it suffered during the calendar year of 2022 so far, breaking up above the 50% Fibonacci retracement level.

Another bullish sign is that the resistance level which had been printed at 4172, was easily broken to the upside.

It is also useful to note that while the NASDAQ 100 Index has also been rising firmly, the bullish momentum is greater in the wider market than in the tech market, making the S&P 500 Index a superior vehicle to trade this advance.

Further upside is likely over the coming week in the absence of any unexpectedly bad inflation news from the FOMC Meeting Minutes or UK or Canada CPI data.

S&P 500 Index Weekly Chart

Bottom Line

I see the best opportunities in the financial markets this week as likely to be in looking for short-term long trades in the S&P 500 Index whenever short-term momentum turns strongly bullish during normal market hours.

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