General US CPI data released last week surprised the market with a lower decline than expected. As such, there is a greater chance of a 75 basis point rate hike at the next FOMC meeting in September. The US stock market reacted with a selloff last week, signaling that the summer rally has overstayed its welcome.
The Dow Jones plunged 1,300 points or 4.2% last week. The S&P500 fell 5.2%, while the NASDAQ fell 6.0%.
The Fed’s interest rate decision expected on Wednesday (UTC -4) will be an important event for US markets this week. The market is currently pricing in an 85% chance of a 75 basis point rate hike and a 15% chance of a 100 basis point hike.
Examining the current price action of the Dow Jones in combination with the Schaff trend cycle indicator indicates that the downside force is still present and may continue to persist. The Schaff trend cycle is currently well below the 25 level at 7.6.
Dow Jones Industrial Average Index, with Schaff trend cycle indicator
However, the current state of this indicator may also be a sign that the Dow Jones may be oversold. In such a case, we would expect the index to reverse and retest the 31,200 level, before continuing the downtrend. Traders looking for a countertrend trade may want to watch and wait for the Schaff trend cycle to close above the 25 levels.
With the upcoming FOMC meeting and the expectation of a rate hike of 75 basis points or more, we can expect a downside reaction during the day and a break above the 30 basis point support zone. 000. Breaking below the 30,000 demand zone will open the 29,500 to 29,000 targets.