Dow Jones Industrial Average Softens on Hawkish Fed Tone

Talking Points

-Dow Jones Industrial Average (DJIA) trades lower on a more hawkish Fed

-DJIA current corrective pattern likely to eat up more time on sideways to lower trading

-Dow Jones Sentiment suggest continued drifting lower

DJIA is trading lower over the past 24 hours but in general there seems to be a 'calm' about the sell off. This is despite the more hawkish tone released in the Fed minutes Wednesday afternoon. Fed futures are pricing for a June rate hike have increased from 4% earlier in the week to 30%. Though up dramatically, if you take a step back, there is still a 70% chance of rates staying the same. As a result, DJIA is holding up fairly well at the moment.

We began talking on May 6 about a correction lower in US30, a CFD which tracks the DJIA, whereby this correction is likely to chew up time more so than price. The technical structure of price action since the April 20 high is corrective with overlapping 3 wave moves.

Dow Jones Industrial Average Softens on Hawkish Fed Tone

The correction lower has retraced minimally in price, but is shallow in time. Said another way, prices may continue to move lower, but it appears to be more of a drift than a waterfall.

The next zone of technical support appears near 16,900-17,144. We will look for prices to grind lower and see how prices react in this support zone.

Regarding sentiment, the Speculative Sentiment Index shows the number of short positions are grinding lower as prices have been grinding sideways (see red line in sub-chart above). This evaporation of short traders suggests that shorts think prices may bounce and are exiting their positions. Long positions are up slightly but not dramatically so the conclusion is that shorts are exiting. Ideally, we would like to see short traders renew their interest since we use SSI as a contrarian type of tool. If we see the SSI reading grow more negative indicating more interest on the short side, then we can begin to look for a tradable low.

Learn more about Speculative Sentiment Index with this 5 minute video.

The above is a shorter term forecast for Dow Jones. If you are interested in our Q2 2016 equities forecast, download it here.