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Dow set to post best monthly performance in 40 years; What’s next?

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AAs I write this, US stocks are trading slightly lower on the final trading day of the week as the Dow Jones Industrial Average is on track for one of its best gains in more than 40 years. The Industrial Average is up a whopping 14.40% this month, and is undoubtedly leading the rally in the US stock market. The question for traders is whether we will see this momentum continue from here.

Reason for optimism

On the fundamental side, one of the main reasons US stock indexes have performed so well this month is that earnings season hasn’t really spooked the markets as much as many expected. Traders and investors feared that we would see a painful quarter, but so far that is not the case. Traders were also concerned about the strength of the dollar and its adverse impact on US corporate earnings. It is true that the headwinds have increased, but they are still within the threshold limits. In addition, many investors and traders believe that the US economy is more likely to have a soft landing than a hard one.

Technically speaking

Looking through the lens of technical analysis, the Dow Jones Industrial Average has tremendous momentum behind it. On the intraday time frame, the price of the Dow Jones Industrial Average is trading above the 50-, 100-, and 200-day simple moving averages (SMA), a sign that price action is being controlled by the bulls. However, the fact that the 50-day SMA is still trading below the 100-day SMA and the 100-day SMA is trading below the 200-day SMA confirms that there is still a threat to the current rally. This is because a bull rally is likely to go into full force only when the 50-day SMA trades above the 100-day SMA and the 100-day SMA trades above the 200-day SMA. Additionally, the price must be trading above all three of these averages on the daily timeframe.

The relative strength index indicates that the current momentum in the Dow Jones Industrial Average may lose some strength as the current reading is above the 70 level, which is generally a sign of overbought prices.

The Fed’s big event

The biggest and most important event this week is the Fed meeting, where the Fed will announce its monetary policy decision. For now, it is clear to investors and traders that the Fed will increase the interest rate by 75 basis points. Traders mostly agree with the Fed’s current monetary policy stance, especially if the Fed wants to stop inflation quickly.

As far as the markets are concerned, the future direction of the trade is not only limited to what the Fed will do this week, but also the future trajectory of their interest rate hikes. I believe the odds are that we will see another interest rate hike of the same magnitude (75 basis points) from the Fed this year, and that it will instead be 50 basis points, which would be positive for US equity markets. little chance.

Conclusion

Fundamental indicators suggest that markets may continue to move higher, especially if the Fed indicates this week that they will slow the process of raising interest rates from December. On the technical side, the Dow Jones price may experience some pullback, but as long as the price continues to trade above the 50-day SMA on the daily time frame, we are likely to see higher highs and higher lows.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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