Dow 30 Trade: Cautious ahead of more fundamental items this week

“Strong” NFP report, rising yields, and dwindling rate cut likelihoods

US equity index futures are in retreat after Friday’s losses (S&P 500 -1.5% to 5,827, Dow -1.63% falling about 700 points to 41,938, Nasdaq 100 -1.6% breaking beneath 21,000) following hotter labour data out of the US that sent Treasury yields higher with the 10-year hitting a 14-month high and the 30-year briefly breaching 5%.

US Non-Farm Payrolls (NFP) for December came in at 256K well above 160K estimates, the unemployment rate dropped a notch to 4.1% also healthier than anticipated (thanks to a household survey increase of 478K), and where m/m (month-on-month) wage growth at 0.3% was as expected but y/y (year-on-year) growth was a lower 3.9%. ‘Good news is bad news’ kicked in as there was leeway for the US Federal Reserve (Fed) to hold on rates for longer, and it didn’t help that UoM’s (University of Michigan) preliminary inflation expectations jumped to 3.3% for both 12-month and five-year figures. Market pricing (CME’s FedWatch) has pushed out a rate cut for this year to July (53/47) with minority likelihoods on a second one in 2025.

In terms of central bank members speaking, there was the Fed’s Goolsbee on the “strong jobs report” that makes him “comfortable that the job market is stabilizing at something like a full employment rate” and “not an indication of overheating”, and sees rates over the next 12 to 18 months “a fair bit lower than they are today”.

This week: US CPI, retail sales, and earnings from the financial heavy weights

We’ve got the US Treasury budget later tonight and a couple bill auctions with the attention on yields globally march higher, and means added focus on pricing data this week with Wednesday’s CPI (Consumer Price Index) for the month of December. Retail sales for the same period will release on Thursday, but on both days earnings from financial heavyweights and more, and include components of the Dow 30 (JPMorgan Chase, Goldman Sachs, and UnitedHealth).

Dow Technical analysis, overview, strategies, and levels

The technicals are no longer pretty on the daily time frame with price not far off getting beneath the last of its main daily long-term moving averages (MA), piercing the lower end of the band, on the DMI (Directional Movement Index) front a -DI well above the +DI, its ADX (Average Directional Movement Index) into trending territory, and an RSI (Relative Strength Index) just about getting an oversold reading. Given the averaging that we saw prior means it’ll take more to shift the overview to a ‘bear average’, but in all contrarians ready for a breakout strategy following last Friday’s moves where the initial win was for conformist buy-after-significant reversals off its 1^st Support level before the second move lower stopped them out and gave contrarian sell-breakouts a clear win. A similar but less fruitful story occurred on the weekly time frame off its previous weekly 1^st Support level.

Speaking of the longer-term weekly, the overview has also shifted to ‘cautious consolidation’, though from a previous ‘bull average’ with price breaking out of its bull channel, on the DMI front a negative cross occurring not too long ago though price still above its main long-term weekly MA’s.

With what’s on offer on the fundamental front means added caution for those opting to go against a market move at key technical levels, and where when the news hits should price already be near shorter-term 1^st levels potentially translating into follow-through beyond them to the 2^nd keeping contrarians at the ready.

IG client* and CoT** sentiment for the Dow

As for sentiment, IG clients shifted to majority buy back in December and have since remained there, with Friday’s pullback in price taking the bias among them from a moderate 58% long to a heavy 65%. On the institutional front, last week’s CoT report has been delayed until tonight, but looking at the most recent report from a couple weeks back and it’s still a story of net long bias among them albeit trimming on successive pullbacks in price.

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 the start of this week for the outer circle. Inner circle is from the start of last week.
**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.