Dow struggles ahead of major fundamental event this week

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When it comes to the week ahead, it rarely gets more impacting than this, and not just in terms of the number of central banks announcing their respective monetary policies, nor the weight of their economies, but what’s at stake in terms of updates that is likely to set the tone for monetary policy for the next quarter if not beyond.

For the US, the Federal Open Market Committee’s announcement (FOMC) is on Wednesday where expectations are there’ll be a speedier tapering of asset purchases from the current $15 billion ($10 billion in Treasuries, $5 billion in MBS) to $30 billion that’ll put earlier rate hikes into play, the dot plot in focus to see to what extent its members will bring forward increases given what markets are pricing at this stage. As for economic data, Producer Price Index (PPI) is on offer tonight. On the US fiscal front, Congress is expected to vote to raise the debt limit, unknown just yet however if the $1.75 trillion social spending bill will pass before Christmas with Manchin saying "anything is possible".

Dow technical analysis, overview, strategies, and levels

Yesterday's pullback while relatively significant, was within weekly levels and would have failed to offer breakouts an edge given the lack of follow-through beyond what are now wider levels (and hence in need of a higher uptick in volatility from major fundamental updates just ahead of the Fed). Defensives sectors were generally on top in yesterday's session, energy and consumer discretionary hit hardest, the index's component performance showing most in the red with losses heaviest for Boeing and Dow, the handful finishing higher led by Coca-Cola European Partners PLC (US) and Johnson & Johnson (All Sessions).

And it's become a common theme for the key US indices - lack of volatility until a volatile downside move, a quick momentous recovery, and thereafter rangebound gains inching towards or beyond record highs. Increased volatility but eventually averaging back, in line with its current ‘consolidation – volatile’ overview that while sounds conflicting on the surface, is reflective of the turbulent moves we’ve witnessed prior.

And while that's great initially for buy-breakout strategies (which outperformed at the start of last week for weekly conformist strategies), once it subsides and they get tested like we saw late last week as its previous daily first resistance level held. That translates into potentially another overview shift had it not been for the impacting event this week that could set the tone in monetary policy for the months ahead.

IG client* and CoT** sentiment for the Dow

For retail traders, it has dropped from what was heavy sell 66% at the start of this week to a slight sell 54% thanks to the price drops yesterday. CoT (Commitment of Traders) speculators according to last Friday’s report are back in slight sell territory, longs up 1,822 lots, shorts up 681. For the other US indices, CoT are majority buy S&P 62% and Nasdaq at 60%, while majority sell Russell 2000 at 59%.

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.}