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Summary: Short sellers are increasing their bets on U.S. stocks amid a big stock market rally. After falling sharply in the previous two sessions, U.S. stocks fell further in Wednesday's trading. The major stock indexes all ended the day in negative territory, with the tech-dominated Nasdaq leading the decline.

Fundamentals

The Nasdaq fell 165.10 points, or 1.2%, to 13,502.20. The S&P 500 fell 23.02 points, or 0.5%, to close at 4365.69, while the Dow Jones Industrial Average fell 102.35 points, or 0.3%, to close at 33,951.52.

Renewed concerns about the outlook for interest rates led to weakness on Wall Street after Fed Chairman Jerome Powell appeared before the House Financial Services Committee for a hearing.

In testimony before the House Financial Services Committee, Powell reiterated that the Fed will likely continue to raise interest rates to curb stubbornly rising inflationary pressures. "Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year," Powell said.

The Fed left interest rates unchanged last week, but the central bank's latest forecast suggests that the Fed plans to resume raising rates later this year. The dot plot shows that the terminal rate is expected to reach 5.6% by the end of 2023.

If the Fed decides to resume its recent 25 basis point pace of rate hikes, the bank is expected to raise rates twice more this year.

Powell noted that inflation pressures remain elevated, and there is still a "long way to go" to achieve the 2% inflation target.

Following Powell's comments, CME Group's FedWatch Tool showed a 74.4% chance that the Fed will raise rates by another 25 basis points after its next meeting at the end of July.

Regarding the stock market, data from S3 Partners LLC show that as the S&P 500 and Nasdaq continued to rise last week, the market's short position in U.S. stocks increased this month to more than $1 trillion. It reached its highest level since April 2022.

Wall Street has mixed views on the next move for U.S. stocks. While the bulls may still have the upper hand after a strong start to the year for the S&P 500, bears insist that stocks are heading lower.

Short sellers are positioned against the optimism of retail investors, betting that the rally in tech stocks driven by artificial intelligence may soon falter. Stocks including Tesla, Apple, Microsoft, and NVIDIA rank high on the "short target" list.

In addition, short sellers have continued to add to their positions as their losses have increased. According to S3, bearish bets against Tesla this year have reached $26 billion, resulting in paper losses of over $14 billion as Tesla's stock price doubled, but there are hardly any signs indicating they are selling their positions.

Technical Analysis

The DJIA continues to be in a corrective phase after forming a head and shoulders pattern following its failure to decisively break above the previous peak at 34,590 (left shoulder, red). This level has evolved into a critical psychological area as bulls have experienced six false breakouts in the past 10 months. Currently, the price is still hovering above the previous support level at 33,788 but remains below the downward-sloping trendline from December 2, 2022.

Momentum indicators seem to be favoring the bears at this critical juncture. While the Average Directional Movement Index (ADX) is hovering below 25's, signaling a range-bound market, the RSI is edging lower, well below its recent peak. More importantly, the stochastic oscillator has broken out of its overbought range and is moving down in an almost vertical fashion.

If the bears continue to push the index lower and manage to break the 61.8% Fibonacci retracement of the downtrend from January 5, 2022, to October 3, 2022, at 33,788, their next target would be the more significant range of 33,353-33,606.

On the other hand, the bulls are looking to retest the August 16, 2022 high of 34,704. However, they must first break the downtrend line from December 2, 2022, in order to surpass the high of December 13, 2022, at 34,704.

Overall, as we have consistently predicted, the DJIA has been unable to break above the 34,704 level, providing an opportunity for the bears to control the market. In terms of trading strategy, going short at highs is recommended.

Trading Recommendations

Trading Direction: Short

Entry Price: 33951

Target Price: 33600

Stop Loss: 34300

Valid Until: 2023-07-06 23:55:00

Support: 33932, 33764, 33606

Resistance: 34142, 34457, 34588