- Summary:
- Dow Jones makes only marginal highs on Feds' dovish message for the USD and forms a rising wedge. A bearish divergence with RSI does not help.
Dow Jones shot higher on the news that the Fed is willing to let inflation exceeding 2%. By changing its price stability mandate, the Fed sent a dovish message to the markets. Effectively, it means lower rates for longer – bullish stocks, bearish USD.
The markets did exactly what the Fed intended – the stocks extended their gains, while the USD tumbled. If the USD had a bounce yesterday and the bulk of selling resumed today, the Dow Jones index added points continuously, stalling at 28,750.
How Does the Fed Mandate Changes?
By signaling its willingness to let inflation shoot higher, the Fed also alters its employment mandate. Unlike other central banks, the Fed also looks at job creation before changing the federal funds rate.
Therefore, lower unemployment alone will not be sufficient for the Fed to send a hawkish statement. Also, higher Personal Consumption Expenditure (PCE) (i.e., the Fed’s favorite metric for inflation) than 2% will also not trigger a change in the Fed’s communication. Instead, persistent inflation above 2% that makes the average inflation rising, will warrant a hawkish tone.
Dow Jones Technical Analysis
Despite the dovish message sent by the Fed, the Dow Jones index managed to put only a marginal new high. Such highs are typical in rising wedges formations. Moreover, when they form against divergent RSI, they signal even further downside.
Dow Jones initially escaped higher after what seemed like a bullish flag. However, the inability to complete the measured move in a timely manner transforms the pattern in a bearish one.
To trade it, consider waiting for the price to break below the lower trendline. On such a move, go short at 28,100 with a stop-loss order at the highest point in the rising wedge formation. For the take profit, use a risk-reward ratio in excess of 1:3, as a rising wedge is often fully retraced.
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Dow Jones Price Forecast
