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Abstract: After the U.S. stock market rose sharply last week, the stock market showed a lack of direction during trading hours on Friday. The major stock indexes fell back from the high level in early trading and have been bouncing back and forth around the opening level.

Fundamentals

Last Friday, the major stock indexes were mixed. The Nasdaq index fell 23.48 points, or 0.2%, to 13,759.34 points, the Dow rose 19.69 points, or 0.1%, to 34,427.75 points, and the S&P 500 index rose 3.59 points, or 0.1%, to 4,429.43 points.

Last week, the Standard & Poor's 500 Index and the Nasdaq Index hit their highest closing levels in more than a year, while the Dow hit a six-month closing high. Wall Street's strong rise came as investors suspended more bets on Friday to assess the prospects after the market's recent strength.

Compared with Dow Jones index and Standard & Poor's 500 index, Nasdaq has performed strongly this year. Wall Street is still optimistic that the wave of artificial intelligence will not disappear soon, and as the market sees different policies of central banks around the world, investors seem to prefer U.S. stocks, especially technology stocks. At the same time, falling inflation expectations may increase investors' recent optimism that the Fed will not carry out its plan to continue raising interest rates.

However, with the imminent emergence of liquidity, the upward trend of U.S. stocks seems to have reached a crossroads.

The high correlation between the Fed's net QE and the S&P 500 index may prove this point. Among them, the definition of quantitative easing by the Fed is that the total assets of the Fed minus the total account balance of the U.S. Department of the Treasury and the temporary cash increased or withdrawn through overnight reverse repurchase.

Although the Fed said that the emergency loan program implemented during the COVID-19 pandemic was not quantitative easing, it could not change the fact that the balance sheet expanded rapidly. As the Fed turns to be more hawkish and continues quantitative tightening, the downside risk of stocks is growing. The previous banking crisis in March, coupled with the subsequent debt ceiling crisis in the U.S., made bank depositors tend to avoid risks, and money market funds showed an inflow of US$5 trillion.

Thus, liquidity is a key driver of the performance of financial assets. Now, liquidity is facing urgent risks.

Although as long as the U.S. Treasury yields are higher than the reverse repo rate, money market funds will have the incentive to buy Treasury Securities, thus filling the Treasury. So far, this process has had little impact on liquidity.

However, if money market funds start to favor other short-term instruments, such as CDs and commercial paper, pricing will be under pressure, and then the U.S. Department of the Treasury will need to rely on bank reserves to further consume liquidity in the coming months, thus pushing down the stock market.

Technical Analysis

The Dow Jones Industrial Average rose strongly last week, about 30% higher than the low on March 15, 2023. Since the consolidation in April, the trend has increased almost exponentially. At present, due to the resistance in the early stage of price testing, it has fallen into a pullback.

There have been some temporary differences in momentum indicators. The Average Directional Index (ADX) is still at a high level, slightly lower than the highest level since November 26, 2021. However, it seems to have reached its peak, because it now points downward. The continuation of this trend will indicate that the further upward trend may have ended. Meanwhile, the stochastic oscillator continues to be directionless in the overbought zone and does not show any clear signs of exhaustion.

If the bulls continue to work on making higher highs, they will surely have to break above the previous resistance at 34712 first. A break above that level will give clear direction to the bulls and thus open the door to all-time highs.

On the other hand, the bears are really hoping that the current consolidation will take hold. If that proves to be the case, they will try to push the price into the recent dense fluctuating range again. And such a drop would be a major short-term win for the bears and help them build momentum for the busier 32500-3200 range.

Overall, the Dow Jones Industrial Average's recent rally stopped at 34,588 and the bulls appear to be exhausted. And while the bears are hoping for a strong correction, the overall technicals are not showing clear signs yet, but structurally, a downside move is in play. It is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 34298

Target price: 32500

Stop loss: 35500

Deadline: 2022-07-04 23:55:00

Support: 34142, 33932, 33764

Resistance: 34457, 34588, 34712