Chapter 22 07/12 US30: Be Cautiously Bullish while the Market Focuses on U.S. June CPI Report
Abstract: In Tuesday's trading, the U.S. stock market mostly rose, continuing the sharp increase in the previous trading day. All three major stock indexes rose, further offsetting last week's correction.
Fundamentals
As of Tuesday's close, the three major stock indexes continued to rise. The Dow Jones index rose 317.02 points, or 0.9%, to 34,261.42 points. The Nasdaq index rose 75.22 points, or 0.6%, to 13,760.70 points; The S&P 500 index rose 29.73 points, or 0.7%, to 4,439.26.
Wall Street's strength comes as investors are expecting the U.S. Department of Labor to release a high-profile report on consumer inflation in June on Wednesday.
After a slight increase of 0.1% in May, consumer prices are expected to rise by 0.3% in June, while core consumer prices excluding food and energy prices are expected to rise by 0.3% in June after a 0.4% increase in May.
In June, the annual growth rate of consumer prices is expected to slow down from 4.0% in May to 3.1%, and the annual growth rate of core consumer prices is expected to decline from 5.3% in May to 5.0%.
Before the next Fed meeting later this month, the June consumer inflation report may have a significant impact on the interest rate outlook.
Before the inflation data was released, the Fed observation tool of the Chicago Stock Exchange showed that the possibility of raising interest rates by 25 basis points again at the next Fed meeting later this month was 92.4%.
As bond yields are still limited, the U.S. stock market rose on Tuesday, as Wall Street seems ready to surpass the key inflation report, which should show that interest rates will remain high for a longer period. The overall consumer price index may drop to 2.9%, and the core consumer price index may hit the lowest level since 2021, but inflation stickiness may still exist.
However, the key driving factor for the rise of U.S. stocks is still the expectation that the easing of inflationary pressure will enable the Fed to end its monetary tightening policy this year. At present, the Fed has pushed the benchmark interest rate from near zero in early 2022 to the range of 5.00%-5.25%.
Of course, there are still downside risks in the stock market. Due to the better-than-expected economic performance, investors have repeatedly postponed the expectation that the Fed's interest rate will peak this year. It is expected that the stock market will fall due to the slowdown of economic growth in the second half of the year.
More importantly, the stronger-than-expected wage increase in June may cause the Fed to raise interest rates this month, and investors expect a high probability of raising interest rates again this year. Therefore, any sign that inflation is still high may put pressure on the high-valued parts of the stock market, especially those technology stocks in the Nasdaq 100 index with an expected P/E ratio of about 29 times.
Technical Analysis
The Dow Jones Industrial Average showed signs of rebounding during trading hours on Tuesday, which was in line with our expectations. The index may continue to try to gain momentum. However, if the price continues to fall after testing our target level of 34,662 and falls below the level of 33,600, it may return to the consolidation range of 89 and 100-day SMAs.
The first resistance level is 34,471, which is very important because it represents the resistance level of multiple fluctuations. In addition, there is an intermediate resistance level of 34,662. This level is particularly noticeable because of its overlapping resistance and its correlation with the 78.60% Fibonacci retracement.
The first support level is located at 33,867, which is considered important because of its overlapping support level. The second support level at 33,635 is a strong support because it represents the multi-fluctuation low support level and is consistent with the 50% Fibonacci retracement.
Overall, the Dow Jones Industrial Average is still in the trend structure of interval repair. It is expected that the price will still fluctuate within our expected range. It is recommended to buy low and sell high.
Trading Recommendations
Trading direction: Long
Entry price: 34200
Target price: 34662
Stop loss: 33600
Deadline: 2023-07-26 23:55:00
Support: 33990, 33867, 33635
Resistance: 34316, 34473, 34660
