Following the more hawkish than expected FOMC meeting, the market and the Dow Jones went into risk-off mode breaking down and selling off for a few days. The market is now fearing the risk of overtightening from the Fed as economic conditions deteriorate and the Fed seems to be resolute to keep financial conditions tight for longer. The absolute worst for the stock market is a too tight monetary policy and a deep recession.
In fact, the Fed has been complaining about the “extremely tight” labour market for several times, they can’t have the confidence in loosening their stance until they see the unemployment rate picking up. So, in the end that leads to a “hard landing” scenario especially since the actual layoffs were always bigger than the Fed forecasts.
DOW JONES Technical Analysis
In the chart above we can see how the market cheered initially as the CPI report missed again expectations but soon after went into defensive mode as the FOMC event approached. The market was right, and the Fed was more hawkish than expected causing a risk-off sentiment in the following days. The price broke down and kept falling until the selling pressure waned.
In the 1-hour chart above we can see how the price divergence with the RSI was signalling a loss of momentum to the downside. In such instances generally the price pullbacks to a previous swing level or the top/bottom of the swing where the divergence started. In the chart above the price retraced back to the top (orange line) of the whole divergent move.
This is also a previous broken support area (blue) that now may turn resistance. In fact, the price is diverging with the RSI again showing some struggle right at the resistance. A break to downside through the blue trendline and the orange line would give sellers more control again.
On the daily chart above we can see how the CPI spike couldn’t break the resistance area at 35200-35400. After the FOMC the price broke down through the blue trendline and the previous swing low support zone.
As the selling pressure waned, the price pull backed and it’s currently retesting the previous broken support that now may turn resistance. On a downward continuation the clear targets are the swing low at 31761 and further down the October low at 28650.
