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Summary: The U.S. stock market remained in negative territory throughout Wednesday's trading, ending the day on a weak note. The major stock indexes all ended with moderate losses despite moving off the day's lows before the close.

Fundamentals

Markets weakened as traders closely watched the progress on a bill to raise the U.S. debt ceiling and avoid a potentially catastrophic default. All major stock indices ended with moderate losses.

The Dow Jones Industrial Average fell 134.51 points, or 0.41%, to close at 32,908.27; the S&P 500 closed down 25.69 points, or 0.61%, to 4,179.83; and the Nasdaq Composite Index closed down 82.14 points, or 0.63%, to 12,935.29.

Later on Wednesday, the House of Representatives passed the agreement reached between President Biden and Republicans on the debt ceiling, thereby averting a U.S. debt default. The bill will now be submitted to the Senate, where it is also expected to receive approval. This marks a temporary end to the debt ceiling uncertainty.

The bill's passage in the House boosted Asian and European stocks on Thursday, with U.S. Treasury yields rising slightly in the Asian trading session, while the U.S. dollar has remained stable. Oil prices continue to fall.

Global equity markets have recently moved lower across the region with a defensive bias. Although equities were generally flat in May, cyclical stocks outperformed defensive stocks considerably in May. The Fed has made several comments suggesting a pause in rate hikes but also indicating that the Fed has not yet peaked, which fits well with our strategy. However, we acknowledge that most of our overlapping models are not as strong as the cyclical performance would suggest, thus opening a negative reality gap.

Yesterday's U.S. employment data surprisingly supported this view, but as we saw in the series of European inflation data released yesterday, inflation is trending downward.

Banks came under pressure yesterday as markets became more concerned about potential liquidity drain in the wake of the U.S. debt ceiling. As reported in Morning Espresso earlier this week, we anticipate a significant issuance of U.S. bonds and quantitative tightening (QT) over the next six months, and the market is preparing for potential liquidity tightening risks.

Technical Analysis

The DJIA continues to weaken, falling from a high of 34,253 at the beginning of May and is currently slightly above 32,594. This correction is not unexpected given recent market dynamics. However, momentum indicators may point to a stronger downside trend rather than just a short-term correction.

The Average Directional Index has weakened slightly from its highest point since the September 2021 rally. Typically, declines from such high levels are associated with reversals of the current bullish trend. The Stochastic Oscillator provides some help when signaling the start of a bearish trend, but it is still lingering within its overbought territory, although seemingly peaking. Therefore, bears should exercise patience and wait until it breaks below its overbought zone.

If the Stochastic Oscillator issues a bearish signal, bears will soon fall below the previous psychological support level of 32,500 and target the more significant 32,500-32,200 range. Even lower, 31,442 is crucial from a market sentiment perspective.

However, if the bulls decide to ignore the mixed technical signals, they will probably have to keep the index above the descending resistance line, currently at 33,600. The next step would be to retest the previous resistance level at 34,225 and attempt a breakthrough. If successful, the downward trend would be completely reversed.

The House agreement on the debt ceiling is expected to boost stocks, but it will be a short-term phenomenon rather than a trend of upward movement. It is recommended to buy low and sell high.

Trading Recommendations

Trading Direction: Long

Entry Price: 32700

Target Price: 33516

Stop Loss: 32000

Valid Until: 2022-06-14 23:55:00

Support: 32588, 32313, 31811

Resistance: 33156, 33346, 33639