Technical analysis: Dow’s weekly technical overview shifts on post-Fed rally

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The recession was the word in plenty of circles following economic data on offer late last week, with the advance GDP (Gross Domestic Product) reading for the US showing a -0.9% reading for the second quarter combined with the first quarter’s -1.6% contraction sent plenty attempting to interpret whether the world’s largest economy is in one already or will be heading for one soon.

It didn’t help that its price index failed to drop from 8.3% to 7.9% but rose instead to 8.9%. It was pricing data the following day that was more noteworthy as PCE (Personal Consumption Expenditures) Price Index rose at its largest pace since 1982 with an increase of 6.8% y/y (year-on-year) and m/m (month-on-month) 1%, its closely watched core up 4.8% and 0.6% respectively with all of them higher (and in turn worse) than expected.

Personal income rose 0.6% (hence down in real terms) and personal spending was up a stronger 1.1% (means tapping into savings/credit), and the revised figures out of UoM (University of Michigan) show consumer sentiment still very much tested even if it managed to rise from 51.1 to 51.5.

Its closely watched inflation expectations readings showed one-year price increases at 5.2% from June’s 5.3%, and on the longer five-year horizon from 3.1% to 2.9% (instead of 2.8% in its preliminary reading). Employment costs failed to drop to 1.2% growth for the second quarter up 1.3% instead.

The US stock market enjoyed big gains post-FOMC (Federal Open Market Committee), and over in the bond market yields finished out the week lower with the five-year dropping back into negative territory where spreads are still mostly inverted. Market pricing for September is a majority for a 50bp rate hike, a smaller 0.25% increase for November also by a majority and one last one by the same amount for December. Breakeven inflation rates were in for a climb, and so too for the five-year forward inflation expectation rate. In central bank speak, the Fed’s Bostic said more rate increases are needed but will depend on the plethora of data between now and their next meeting in September.

As for the week ahead, it’s another busy one on multiple fronts. We have PMIs (Purchasing Managers’ Index) for China out of CFLP yesterday showing contraction for manufacturing with a 49 reading and Caixin’s this morning a miss barely expanding at 50.4. We’ll get more today when it comes to manufacturing with ISM’s reading for the US expected to show a worsening 52.3 improvement. Services will be on Wednesday, but given the first Friday of the month is near means we’ve got to brace for US employment data.

Job openings will be tomorrow and there are job cuts on Thursday alongside unemployment claims where the latter suffered another consecutive miss in its latest reading released last week. Leading up to the market-impacting Non-Farm Payrolls where forecasts are pointing to a 250K increase, but where its household survey which has diverged from the establishment one will also be noted. The unemployment rate is expected to stay unchanged at 3.6%, and wage growth to rise by 0.3%. There are more earnings for the US but involve components of far smaller weighting than what we saw last week with Big Tech.

Dow Technical analysis, overview, strategies, and levels

The shorter-term technicals have gotten more positive as of late thanks to the post-Fed rally, and an overview shift from 'bear average' prior in this weekly time frame but where a few of its boxes can shift with relative ease. Prices ended above their previous weekly 1st Resistance level giving (under its previous overview) contrarian buy-breakouts the edge and for the daily needing Friday's session to get past Thursday's 1st Resistance level more cleanly.

The component performance put Chevron (beating estimates, raising the upper end of its share buyback guidance) and Caterpillar well on top by Friday's close, with Intel (earnings and revenue miss, full-year expectations lowered) and P&G (slight earnings miss) suffering most on the other end amongst a clear minority finishing in the red.

IG client* and CoT** sentiment for the Dow

CoT speculators (as of last Tuesday so pre-Fed) raised their heavy sell bias from 66% to 70% on a drop in longs by 806 lots and a simultaneous increase in shorts by 1,868 lots. Retail trader bias started last week majority short 55% and has since risen into heavy sell territory at 66%.

Dow chart with retail and institutional sentiment