Dow Jones, Hang Seng analysis: Slightly hot data could weigh on risk

The Fed’s easing cycle has been well telegraphed. Yet market pricing continues to be more dovish than the Fed’s narrative, specifically over the next three months. The Fed’s dot plot suggests an additional 50bp of cuts into year end, yet markets are pricing in 75bp.

I have had the sneaking suspicion for a while that US economic data could outperform weak expectations, and that could spell trouble for some overextended markets such as gold and Wall Street indices. It seems there are some nervous rates traders ahead of key US data, which includes GDP later today and PCE inflation tomorrow. Bloomberg reported that the SOFR market saw its their “biggest futures trade on record” on Wednesday, suggesting a hefty profit has been booked or the trader doubts ambitiously-dovish market pricing ahead of key economic data. This sent US yields and the US dollar higher.

Wall Street could see a deeper pullback if US data comes in even slightly hotter than expected. Despite posting intraday record highs on Wednesday, the S&P 500 and Dow Jones closed the day lower, although it is the bearish engulfing day which stands out on the Dow. Could this be the canary in the coal mine for risk?

Dow Jones futures (YM) technical analysis:

Dow Jones futures experienced their most bearish day in 13 on Wednesday. Volumes were trending lower during its recent rally and there was a slight RSI divergence on the daily RSI (2) ahead of the selloff. It looks like the market wants to at least retest the July and August highs just above 42k.

Yet the 1-hour chart has found support around the 200-bart EMA, and a spike low suggest intraday support resides around 42,200. I suspect prices will hold above the overnight and 200-hour EMA low during Asia and post a minor bounce, allowing bears to potentially fades into moves up to the 100-hour EMA / 42,400 area.

Bears could target the support zone around 42,070 and a break beneath 40,000 brings the 41,850 low into focus (near the 38.2% Fibonacci level).

While I suspect a pullback is brewing, I am not overly bearish equities and open to the Dow Jones and S&P 500 reaching new highs after any such retracement.

Hang Seng futures technical analysis:

There is nothing particularly profound about the analysis I am about to reveal, other than the fact that we have a very strong move which is slowing into resistance. The 16% move on Hang Seng futures over the past nine days is likely in need of a breather, and clues of a retracement are already surfacing.

An elongated shooting star formed on Tuesday, which saw a false break of (and daily close beneath) the May high. The 1-day reversal candle was also accompanied by negative delta (more offers than bids) which suggests a change in sentiment. Overnight price action has so far provided an inside day mostly within the wick of the shooting star while remaining beneath the May high.

A lower high has formed on the 1-hour chart, price action on thew small rally into the lower high appears to be corrective. Therefore, bears could seek to fade into moves towards the May high and target 19,000 (near the 61.8% Fibonacci level) or 18,800 near the 100% projection.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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