Chapter 11  07/06 US30: Bulls and Bears Engage in Another Stalemate, Focus on Buying Low and Selling High

Summary: U.S. stocks were flat on Wednesday after Tuesday's Independence Day holiday. The market was nervous again after the minutes of the Federal Reserve's June meeting showed more details that were not known. Major stock indices closed in negative territory.


Internal divisions within the Federal Reserve over the June decision were evident, with some officials who initially leaned towards "pausing rate hikes" now inclining towards "raising rates" (among the 18 officials with voting and non-voting rights, a few may have been in favor of rate hikes). This raises the possibility of further rate increases by the Fed.

Officials supporting rate hikes cited the stronger-than-expected momentum in economic activity and the absence of signs indicating a retreat from the 2% inflation target. Inflation stickiness remains high.

Most officials believed that maintaining the interest rate unchanged in the June meeting would provide more time to assess economic progress.

Nearly all officials indicated that further rate hikes may be appropriate, and most emphasized that post-meeting communication with the markets was critical to conveying this message and that future Fed officials' speeches will be biased in this direction.

The meeting minutes mentioned economic recession three times (compared to four times in February, three times in March, and two times in May). Fed researchers believe that the possibility of avoiding an economic recession and falling into a mild recession is roughly the same.

Following the release of the June meeting minutes, major stock indices closed slightly lower. The Dow Jones Industrial Average fell 129.83 points, or 0.38%, to 34,288.64. The S&P 500 Index declined 8.77 points, or 0.2%, to 4,446.82, while the Nasdaq Composite Index dropped 25.12 points, or 0.18%, to 13,791.65.

The minutes left investors with the impression that "the pause in June was a fluke and that a July rate hike was the base scenario envisioned by policymakers".

Currently, futures traders are pricing in a nearly 90% probability of a 25 basis point rate hike by the Fed in July and a close to 20% probability of another rate hike in September. However, they do not believe there is a possibility of two further 25 basis point rate hikes before the end of the year, and the probability of a rate cut before the end of January 2024 is close to zero.

Although U.S. stocks have shown strong performance in the first half of this year, this momentum may not last long as higher interest rates and a decline in economic growth could dampen the stock market's rebound. Meanwhile, it may undermine the current market optimism. While the AI boom may sustain the stock market for a few more quarters, the "super bubble" in stocks, real estate, and commodities is likely to burst eventually, although the inevitable collapse may be postponed for a few more months.

07/06 US30: Bulls and Bears Engage in Another Stalemate, Focus on Buying Low and Selling High-Pic no.1

Technical Analysis

The DJIA closed slightly lower on Wednesday. Although the bearish double-top pattern is gradually forming, the bullish trend has not been completely exhausted, resulting in a tense market standoff.

Meanwhile, the momentum indicators are not yet ready to support a downward trend. The RSI remains above the midpoint of 50, and the Average Directional Index (ADX) is still below 25, indicating that the market is still in a range-bound phase. More importantly, the stochastic oscillator is consolidating, slightly below its overbought level, and preparing to test its moving averages. A decisive downward move would be seen as a bearish signal, favoring the formation of the double-top pattern. However, the strong support in the 34,000-34,100 range may lift prices again.

If the bears decide to take control of the market, they will need to break below the critical support range of 34,000. They will then encounter the 33,367-33,754 range, which can be considered highly significant. The dynamic support provided by the 50-day and 100-day SMAs will truly test the determination of the bears.

On the other hand, the bulls aim to retest the high point of December 13, 2022, at 34,589. Breaking above it, the busy range defined by the highs of April 21, 2022, and May 10, 2021, at 35,091-35,496 will be a crucial obstacle for the bulls to overcome.

Overall, although the momentum indicators show a moderate stance, a bearish pattern is forming. However, the market may exhibit a trend structure of "stop-loss hunting" in both directions. In terms of strategy, the focus should be on buying low and selling high.

Trading Recommendations

Trading Direction: Long

Entry Price: 34000

Target Price: 34589

Stop Loss: 33600

Valid Until: 2023-07-20 23:55:00

Support: 34000, 33972, 33820

Resistance: 34100, 34217, 34377

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