Dow’s strong weekly finish tilts long-term technical indicators

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We got some US economic data late last week following the Federal Reserve’s (Fed) 25 basis point rate hike. The manufacturing out of the Philadelphia Fed besting estimates following the contraction in the New York Fed’s reading earlier in the week. Housing data was mixed with building permits dropping, housing starts rising, and home sales falling by its most in a year.

The coronavirus has been resurfacing in the headlines capturing some focus, with average cases rising in many parts of Europe, but the bulk of the attention on China. Given China’s tougher stance, it has the potential to exacerbate supply chain woes at a time when the global economy seemingly can afford little of it. Alongside higher oil prices, yesterday the Canadian Pacific Railway halted operations set to disrupt shipment of key commodities like potash for fertilizers.

Yields finished the week higher across the curve but were more tested on the further end last Friday. The spread between the 10Y and 2Y within the 21 basis point handle, on the verge of crossing into negative territory between the 10Y and 5Y, and already there for the 10Y-7Y. Markets are fully pricing in a 25 basis point out of the Fed in May but majority seven by the end of the year, and breakeven inflation rates dropping a bit but still near recent highs with the 5-year shy of 3.5% and the 10-year still below 3%.

When it comes to the week ahead, we’ll get more housing data on Wednesday and Friday, sandwiched in between durables and the weekly unemployment claims, and the usual oil, gas, and distillate inventory data out of API before EIA’s more encompassing estimates the day after. Preliminary manufacturing and services PMIs will be on Thursday. As for central bank speak, there’s plenty of it, with the Fed’s Powell speaking twice and plenty of other members throughout the week.

Dow technical analysis, overview, strategies, and levels

Tech outperformed amongst US sectors last Friday where only defensive utilities finished in the red, and component performance put Salesforce on top followed by Nike (who are expected to release their earnings today) and Visa, the other end showing Verizon and J&J leading the losses.

Four consecutive days of decent price gains for the Dow translated into a strong positive weekly finish. That in turn easily gave contrarian buy-breakout strategies the edge on the weekly time frame, while less so on the daily with conformist sell-on-reversal strategies off of its previous 1st Resistance level initially winning out on the retracement before a (not-via-reversal) move past it when incorporating Friday's gains. The technical overview for indices are generally trickier given it's a very wide bear trend channel and as mentioned prior opens the door to potential successive gains even if the channel manages to hold.

When it comes to its technical overview, it needs less to shift its heavily stalling bear trend in this time frame (it has already shifted on the shorter-term daily time frame). With a couple of technical indicators already tilting to neutral with prices above nearly all its main weekly moving averages and no longer at the lower end of the band.

IG client* and CoT** sentiment for the Dow

Retail trader bias has shifted since the start of last week from a majority buy 61% to a near exact opposite majority short 62%, a similar theme occurring with the FTSE, DAX, and ASX thanks to last week’s gains.

As for CoT speculators, still majority short and a notch higher at 64% that’s shy of heavy sell levels, long positions reduced by 1,025 lots and shorts dropping by 929 lots.

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.