Another red week for the Dow as technicals get further tested

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US economic data late last week showed retail sales grow overall and at its core and opposite expectations of another contraction, UoM’s preliminary consumer sentiment reading a miss once more though improving slightly off the lows, manufacturing data out of the Philadelphia Fed, improving while unemployment claims rose.

The theme on the inflationary front was that of high prices but slowed growth when it came to Consumer Price Index (CPI) readings for the US, import prices contracting month-on-month though remaining very high year-on-year. Globally, Chinese shares were in general retreat, dual fears of slowdown and regulatory updates with Evergrande’s meltdown in focus with an interest payment due later this week as its exposure to a number of banks and financial institutions spark fears of risks on a large scale. In US fiscal policy, the $3.5 trillion package advanced in the House, President Biden confident both the large plan and the bipartisan infrastructure plan will make its way through Congress, ongoing discussions of continuity in funding government operations ahead of the deadline at the end of this month (not to be confused with the debt ceiling that deals with paying for past expenditures, expected to run out in mid-October and getting renewed warnings from the Treasury Secretary for Congress to raise it or risk “widespread economic catastrophe”).

As for the coronavirus, cases above 228 million, deaths on the verge of crossing above 4.7 million, hospitalizations in the US dropping though still high, and on the vaccine front the Food and Drug Administration (FDA) advisory committee on Friday rejecting booster shot plans for the general public while recommending for those 65 and older and high risk (via emergency use authorization), shares of vaccine makers finishing lower.

When it comes to the week ahead, it’s expected to be far more impacting, the sum of what we’ve seen so far in terms of sluggish employment progress with the start of the month’s Non-Farm Payrolls and prices still high for year-on-year inflation readings culminates with the US Federal Reserve’s monetary policy announcement this Wednesday, expectations that the tapering announcement will be pushed until November given last week’s data that at this stage could still fit into the central bank’s transitory inflation theme. Gross Domestic Product projections for this year likely to be lowered, pricing to be raised, and where investors and traders will be noting the dot plot for a rate hike brought forward into 2022.

In terms of economic data, plenty of housing data out of the US with building permits and housing starts tomorrow, existing home sales and the weekly Mortgage Bankers’ Association (MBA) mortgage applications the day after that, and new home sales on Friday. Everyone wants to know how both manufacturing and services sectors have been faring as of late in the face of the delta variant, and that makes Thursday’s preliminary Purchasing Managers Index for the month of September important in terms of setting the tone.

Dow technical analysis, overview, strategies, and levels

US indices remained tested last week, the Dow breaking beneath a short-term support level last seen in August, and where from a strategic standpoint neither of its previous weekly levels were reached.

On the daily late last week going past its previous first support's stop loss (S/L) before retracing back up in line with its 'consolidation - volatile' overview in that time frame that has seen price movement beyond S/L levels intraday, even if it has been averaging back to a lower price level.

Few of its components finished on top with gains for aAmgen Inc and UnitedHealth Group Inc (All Sessions) as only health as a sector finished higher, losses heaviest for Wall Street and Caterpillar Inc (All Sessions).

We've got some housing data today (and for most of the week), but it'll be about the Fed this Wednesday and any further fiscal updates as we approach the government shutdown deadline.

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IG client* and CoT** sentiment for the Dow

In sentiment, Commitment of Traders report speculators remain majority short raising their sell bias from 56% to 58% on a drop in longs by 1,171 lots outdoing a smaller drop in shorts by 291 lots. They remain slight buy US 500 and US Tech 100, while heavy sell Russell 2000.

For retail traders, sentiment is little changed week-on-week starting off with a majority buy 58%, though intraweek it reached a slight buy 51% before the price plummet enticed fresh longs into entering and shorts into unwinding.

Dow chart with retail and institutional sentiment

^{*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.}

^{**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.}