Markets fell yesterday, with the US30 declining 1.67% on the day. The decline shows concern regarding the Fed's rate hiking path, with the "higher for longer" paradigm pricing in, as the flash PMIs came in hotter than expected.
Daily Time Frame
US30 (top chart) is trading in its bearish channel, between the lower blue and red bands. Its Bollinger bands tightened (green vertical rectangle) and are now expanding. This suggests an expansion in volatility. A harsh decline may be the order of the day if the expansion is accompanied by the index hugging its bearish channel.
The daily chart's stochastic is a concern. It has slipped into its lower quintile (red arrow). This is a momentum indicator and the longer it maintains these levels, the greater the chance of lower prices ahead.
Weekly Time Frame
The US 10-year real rate (middle chart) trades in its neutral region between the blue bands. It is threatening to move into its bullish region between the upper blue and red band, which reflects a hawkish Fed as it battles against sticky inflation.
US30 (top chart) has dropped from its bullish region into its neutral region. This is a relative weakness. The correlation coefficient (bottom indicator) between the two series is -64%, implying further weakness in the US30 if the real rate moves higher.
Real rate Bollingers are squeezing (red rectangle). Again, the proverbial calm before the storm, i.e., the real rate may price up as markets come to terms with a higher terminal rate.This will be adverse for the stockmarket.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.