Chapter 42 05/22 DJIA: Debt Ceiling Negotiations Suffer Interruptions, Bears May Be Eager to Return
Summary: U.S. stocks were mostly lower throughout the trading session after rising in early trading on Friday. Major stock indices retreated from their early highs and moved into negative territory. We believe U.S. stocks will continue to drift lower today.
Fundamentals
The Nasdaq and S&P 500 touched nine-month intraday highs in trading on Friday, but still ended the day lower. The Nasdaq fell 30.94 points, or 0.2%, to 12,657.90, while the S&P 500 lost 6.07 points, or 0.1%, to 4,191.98, and the DJIA dropped 109.28 points, or 0.3%, to 33,426.63.
Although U.S. stocks still saw a slight correction at the close of trading on Friday, the major stock indices were higher for the week. The Nasdaq was up 3.0%, the S&P 500 was up 1.7%, and the DJIA was up 0.4%.
The Wall Street slump came as Republican negotiators pulled out of a meeting on raising the U.S. debt ceiling, offsetting recent optimism that a deal was imminent.
"Until people are willing to have reasonable conversations about how you can actually move forward and do the right thing, then we're not gonna sit here and talk to ourselves," said Republican Congressman Garrett Graves.
Even though the U.S. could face default as early as June 1, Graves said he didn't know if negotiations would resume by the end of the week.
Stocks were sold off and yields rose.
The U.S. 2-year Treasury bond soared above 4.30% on Friday. Despite Fed Chairman Jerome Powell saying last Friday that interest rates might not need to rise as expected to curb inflation due to banking pressure playing a good role in limiting inflation with credit conditions, Powell pointed out that inflation is still too high and emphasized that the Fed will be "firm" in pursuing a target of bringing inflation down to 2%.
Aside from Powell, it seems that Fed members have yet to decide whether to continue hiking rates or pause. However, no one believes that the U.S. will cut interest rates this year.
Technical Analysis
The DJIA continues to be under pressure, maintaining an upward trend with a series of higher highs and higher lows after bouncing back consecutively last Thursday and Friday. The bears seem eager to return as the latest trend has been on the aggressive side.
Meanwhile, the Average Directional Movement Index (ADX) is well below 25, and the Stochastic Oscillator seems to signal the next move. It is hovering in overbought territory and above its moving averages. A fall below these two levels would constitute a bearish signal. In addition, a mild bearish divergence is forming as the lower highs of the Stochastic Oscillator meet the higher highs of the index.
The first support is at 32,595, which is seen as multi-band low support. This is a level where prices have bottomed out several times in the past, indicating strong levels of demand. The intermediate support is at 33,020, also a multi-band low support, adding a layer of demand before prices hit the first support.
If the bears are sensitive to these weak signals, they will try to push prices back down below 33,121. On the other hand, if the bulls are confident, they will aim for the critical level above 33,675.
Overall, the structural uptrend might make the bulls very confident and ready to continue pushing higher. However, the bearish pressure is increasing. It is recommended to go short at highs.
Trading Recommendations
Trading Direction: Short
Entry Price: 33512
Target Price: 32968
Stop Loss: 33820
Valid Until: 2022-06-05 23:55:00
Support: 33337, 33214, 33120
Resistance: 33479, 33512, 33653
