The S&P500 Index closed at new highs with the 10-year Treasury yield at 1.44%.
The cross-section of sector performances shows profit taking on sectors exposed to the macro cycle and buying on growth and defensive stocks. In fact, markets are discounting an accommodative monetary policy for a long time to come and are espousing the Fed’s theory that the jump in inflation is (only) temporary.
Thursday’s inflation figure hints towards a short-term quality. However, we must ask ourselves how much longer companies will be able to bear the costs linked to shortages of raw materials and labour. But on the labour market front, there is another interesting aspect to be noted. The trend in real wages in the last two months has been downwards. They have been affected by the sharp rise in inflation. This could lead to wage claims in the future, claims that would increase costs for companies which inherently will be passed onto the prices of final products. At that point, inflation would be structural and not temporary.
This week will be particularly busy. On the one hand quarterly technical deadlines, on the other FED and FOMC projections scheduled for Wednesday evening. Markets expect discussions on tapering and the asset purchase program to begin. Will there be talk of a shift in sentiment towards interest rates? Projections will be a key element.
Inflation data in Europe and in the USA along with retail sales will be other elements that will accompany the markets and can offer moments of volatility.
Analysis of the week and scenarios for DAX and Dow Jones
This time, inflation was not a problem for the markets, weekly supports were maintained and we witnessed new all-time highs on DAX and S&P500. The FED meeting will be very important to understand the possibility of a correction but talking about a reversal is still too premature. There are neither signals from the markets nor general conditions. This rise can last another two months, so we will follow the market trend as always.
This week, we should again see a low at the beginning of the week and a high on Friday. It will always be a good idea to monitor the intraday trends so that the weekly supports hold and give us the possibility to see the bullish directional phase confirmed.
DE30 – Last Monday, the German index reached new all-time highs touching the 15,731 area. The resistance 15,655 was broken down in the European opening on Monday offering a strong bullish push. The rest of the week saw some weakness in the DAX in line with the US indices which however held our weekly support in the 15,578-15,545 area. The weekly close showed further upside momentum closing near the week’s highs in the 15,731 area.
Last week’s weekly highs, 15,656-15,755, may be reached this week as 15,755 is very close. Extensions in case of a bullish acceleration have a target area of 15,900. The real goal of the DAX is to reach the 16,000-16,200 area. The price needs to hold the new volumetric resistance area 15,651-15,693 in order to continue upwards.
New weekly support around the 15,651 area. The 15,606-15,578-15,545 area held well any bearishness; only below it we could see some important corrective pressure.
A particularly vital support can be found in area 15,423-15,384. Below this, there is a possibility to see weekly bearish reversals. Further support remains in area 15,269-15,209. We confirm the key area for maintaining the bullish strength at 15,209. All these levels are optimal for buying.
Supports in the area 15,119-15,062-15,043 are still 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 the first target in the area 14,600-14,441.
US30 – This week the Dow Jones index has suffered a lot in a narrow sideways. The volatility of the trading session suggests that investors are still undecided about what the higher-than-expected consumer inflation report means for the Federal Reserve’s next monetary policy decisions on June 16th.
Last Monday, the U.S. index pushed hard into the upper end of final resistance 34,717-34,846, gateway to new all-time highs. However, and with perfect precision, the market turned sharply in the afternoon maintaining a corrective phase that led it to test again the 34,445-34,395 support level. The difference is that this series of decreasing highs leads us to see a break-down of this support at the beginning of next week. Therefore, until Wednesday we will not have a chance to see if the Dow Jones can turn strongly upwards. The rollovers are not helping.
The 34,716-34,846 area has not been broken and as long as the prices do not go above it, the 35,000 points cannot be seen. Next target is at 35,500 and it could be possible to go even further.
The 34,570-34,485 area is an intermediate zone that we will take into account as a resistance when the price will touch it again. A reliable bullish signal might come from the recovery of 34,700 area.
Confirmed once again, the weekly support placed in the 34,445-34,395 area, is essential to maintain the current bullish trend. Below this level, we will have to carefully monitor the 34,307-34,223 area.
The area at 34,015 – 33,976 is a fundamental support. Intermediate supports are seen at 34,307 and 34,134.
Key supports for the bullish trend can be found at 33,873 and 33,585. If lost, the bearish pressure could come back strongly and with it the presence of a bear market. First target is placed at 32,956.
IMPORTANT NOTE: Nasdaq and Dow Jones still need to push to make new all-time highs but the fact that the S&P500 index made new all-time highs is a strong bullish signal.
These differences force us to make choices on an intraday level because some indices will tend to move better than others. Therefore, looking at charts of different instruments will help us to make better decisions.
The rollovers and the FED will weigh a lot on the price movements. Also, this week it is wise to take note of Monday’s openings and Friday’s closings to confirm or deny the current trend. Avoid overtrading and watch out for volatility imprinted by HFT. The FED can change or strengthen the weekly trend. Take notes of any gaps that may appear during the week as well.
Have a good trading week!
Research provided by Giancarlo Prisco
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