Keep an eye on economic data

Last week, news of a more friendly Fed and continuing signs of tame inflationary data helped the equities markets turn in one of their better performances in weeks. The Dow rallied nearly 300 points for the week, helping the index break out of its recent range into higher ground. In fact, the Dow chart is looking pretty bullish from a technical standpoint, since it has pushed up into a slightly higher, new trading range. At the same time, one would assume some backing and filling may be seen after the recent move north. Keep in mind also, the recent move in the indexes came on very strong advance/decline numbers, so as those numbers come back a bit, I would expect to see further profit-taking.

With regard to the NASDAQ Composite, this recent week has changed the chart on the index from pretty sickly to a much more bullish picture. Seeing the NASDAQ firmly reclaim the 2100 level is very bullish from a technical perspective and the fact that it did so with such authority gives me confidence that any pullback would only work to install a "higher low" on the chart. While it's difficult to say if a re-test might penetrate the 2100 level, my guess is that the worst case is the 2050 level would hold. Again, while these are two very bullish developments on the major indexes, I would still nonetheless remind you that some testing and retracement is probably likely in the near-term.

Moving forward, it will continue to be important to keep an eye on economic data. This most recent rally in the market was largely founded on the Fed taking a less hawkish stance. Nonetheless, the FOMC was pretty clear in its language, insofar as leaving the door open to further adjustments if needed. As such, if signs of further inflation do start showing up (i.e. CPI inflation heating up, real estate market heating up, etc), it's not unimaginable that the Fed could toss another interest rate increase or two into the mix, just for good measure. So while the coast does appear to be clear for the near-term, I would still suggest caution if any signs of inflation continue in the data. If the Fed sends signals that they may have to raise rates again, it's very likely that the recent gains we have seen could come back out of the markets in pretty short order.

Please feel free to email me with any questions you might have, and have a great trading week!

Chris Curran

Chris Curran started his trading career at the age of 22 with a national brokerage firm. He combines fundamental and technical analysis to get the big picture on the market. Chris has been trading for 15 years, starting full time in 1997, and has never had a losing year as a full-time trader.