Dow rally needs a Fed recharge

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By :  ,  Financial Analyst

A pause in tightening may no longer be enough.

Only the abrupt halt of the Federal Reserve’s tightening cycle has saved markets from severe selling pressure, according to renowned bond investor Jeffrey Gundlach. As trade-talk optimism returns to buoy large markets, it may be too early to judge whether such pessimism is misplaced or not.

Yet, the approach of next week’s Federal Reserve statement is probably a potent cautionary influence. With no prospect of a policy change, participants are fixating on the FOMC’s planned forecast tweaks and any changes to its bias for one hike this year and one in 2020. Aside from last week’s weak-payrolls shock, largely solid economic data implies the Fed can reserve judgement for months yet. As such, inflation and growth forecasts are likely to be reduced only moderately. Such cues could underpin U.S. markets for a further spell, but greater clarity will be needed for a concerted push back to recent zeniths.

From a chart perspective, the Dow Jones e-mini future’s breach of a beautiful January-March trend has left it less assured. Modest gains on the day and week were too tentative to penetrate layers of resistance from around 25890 that protect 2019 highs.

The 100-hour moving average has at least pulled up from a recent dive. Yet a flatter intermediate trend gauge should still temper perceptions. Early next week, the Dow will need to remain above such thresholds in order to mount further attacks on overhead barriers. Any failure risks a more pronounced descent that will target swing lows near 25250 as a first course.

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