Chương 44 05/23 DJIA: Wall Street Seems to Be Preparing Contingency Plans in Response to Debt Default
Abstract: After closing slightly lower last Friday, U.S. stocks performed relatively poorly on Monday. Major stock indexes rebounded back and forth at the opening level of the day. Wall Street seems to be already preparing contingency plans to deal with the debt default.
Fundamentals
The three major U.S. stock indexes closed mixed on Monday. The Standard & Poor's 500 Index rose 0.65 points, or 0.02%, to 4,192.63 points. The Nasdaq index rose 62.88 points, or 0.5%, to 12,720.78 points. The Dow Jones index rose slightly at the opening and then fell, but remained weak throughout the trading day, and finally fell by 140.05 points, or 0.42%, to close at 33.286.58 points.
Up to now, the two parties in the U.S. have not reached an agreement on the debt ceiling, and the "deadline" warned by Secretary of the Treasury Yellen is drawing near on June 1. It seems that traders, rating agencies, banks, and the Federal Reserve have entered a "state of preparation" to prepare for a possible panic.
In the event of default, traders' challenges usually include how to deal with the payment of U.S. Treasury Securities, how the key financing market will react, how to ensure that there are enough technology, personnel, and cash to handle the high trading volume, and how to check the potential impact on customer contracts.
In the worst case, the Department of the Treasury runs out of cash, becomes unable to pay the principal and interest, and does not announce the extension, thus forming a technical default, when these unpaid bonds will no longer be traded. In either case, it may lead to major operational problems, and the institution needs to make daily manual adjustments in the transaction and settlement process.
When trading on Wall Street fluctuated, investors seemed reluctant to take major actions because they were waiting for more news about the debt ceiling negotiations after the talks broke down last Friday.
At the same time, the hawkish remarks of some Federal Reserve officials have raised concerns about the interest rate outlook.
St. Louis Federal Reserve Bullard said that the current inflation level is still too high, and the market overestimates the possibility of a recession in the U.S. He predicted that the Federal Reserve would need two more 25bps interest rate hikes to curb inflation.
He also said that the possibility of a recession in the U.S. was exaggerated, and he did not think that the U.S. economy would go into recession. Bullard pointed out that although the job market has slowed down, it does not mean that the economy will decline. Economic growth will be at a slightly lower level.
Minneapolis Federal Reserve Kashkari said that if the Federal Reserve really suspends raising interest rates, it should show that the tightening policy is not over yet.
Investors also seem to be waiting for some key economic data this week. The personal income and expenditure report and the minutes of the Federal Reserve's latest monetary policy meeting will be released this week.
The lack of major U.S. economic data may also keep some investors on the sidelines until some key data are released in the next few days.
Technical Analysis
The recovery of the Dow Jones Industrial Average (DJIA) since its low of 32,449 on April 27 has stopped, and the DJIA is currently hovering around the range of 33,276. The low of 32449 on April 27 now acts as mean support, and the bulls hope that the support level that has fallen recently will prove to be only a local low.
Nevertheless, momentum indicators do not really support bulls. The Average Directional Index (ADX) shows a moderate bearish trend, and the stochastic oscillator continues to fall, approaching the oversold zone. These indicators may consolidate in the next few trading days, prompting investors to re-evaluate their strategies.
If the bulls decide to control the market, they will have to clear the upward intensive suppression range where the 20-day and 100-day SMAs are located. Even if it can break through this level, it is still suppressed by the downward trend line. This level has been an upward obstacle to limit the bulls' further rise since the price hit the mid-term bottom on March 15. It is expected that the pressed state will remain stable.
On the other hand, bears will first fall below last Friday's low point to complete the demand area test of the 33130 level, and then continue to fall below the low level of 32947 on May 4, paving the way for a further decline to the familiar support level before 32500.
Overall, the bulls are trying to defend the level of 33215 in the short term and push up the index, but the overall technical aspects are still unfavorable to them. Breaking the 33012 level may lead to a stronger downward correction. It is recommended to go short at the highs.
Trading Recommendations
Trading direction: Short
Entry price: 33286
Target price: 32500
Stop loss: 34100
Deadline: 2022-06-06 23:55:00
Support: 33125, 33012, 32935
Resistance: 33509, 33810, 34090
