DJIA

Wrapping Up A Brutal October For The U.S. Indices

Posted Saturday, October 27, 2018 by
Shain Vernier • 2 min read

October has been a trying month for the U.S. indices. To open the first week of action, both the DJIA and S&P 500 rallied to all-time highs, extending the strength of September. The bears then stepped in and dominated trade for the next three weeks. As we head toward the finish line in 2018, one has to wonder if a full-blown equities market correction will be underway by January 1, 2019.

The CME FEDWatch Index

Conventional wisdom tells us that rising rates and a tightening U.S. FED policy are bad for business. Equities markets typically suffer as corporate interests struggle to achieve growth projections. Are the days of cheap and available money over in the U.S.?

It is beginning to look like it. September’s FED projections have scared long-term investors from assuming any fresh risk in the stock market. In fact, the prevailing sentiment among traders is that FED tightening is the new norm, although the exact schedule is ambiguous. Check out the CME FEDWatch Index odds of successive rate hikes through next June:

FED Meeting                    % Chance of A Successive 25 bps Rate Hike

November 2018                                                   4.6%

December 2018                                                   67.2%

January 2019                                                       7.3%

March 2019                                                          39.9%

May 2019                                                              7.4%

June 2019                                                             3.7%

Basically, the FED is expected to bump rates this December and next March. After that, they will be taking a wait-and-see approach to the economy as 2019’s summer months roll by. According to the FED’s dot plot from the September meeting, three rate hikes are projected for 2019. As of now, traders are expecting them to be back-loaded toward the second half of the calendar year.

U.S. Indices Under Pressure: A Miserable October For The DJIA

There is no way to sugarcoat it ― October has been brutal to the DJIA. The chart for the December E-mini DOW futures contract illustrates the extent of the damage. Thus far, values have fallen in the neighborhood of 200 ticks in October, closing in the red 13 out of 21 trading days. Not a good run for a market in a long-term uptrend.

December E-mini DOW Futures (YM), Daily Chart
December E-mini DOW Futures (YM), Daily Chart

There are two levels to be especially aware of in the E-mini DOW as we prepare to kick off a new trading week:

  • Resistance(1): 38% Current Wave Retracement, 24961
  • Support(1): Psyche Level, 24000

Overview: 24000 is shaping up to be a potential support level for the coming week. Price last tested this area in late-June. Back then, buyers stepped in and ran the market north for the summer. Perhaps another hard test and rejection of this area will be the precursor for a strong Q4 in the U.S. indices.

Until proven otherwise, one has to respect the intermediate-term downtrend in the DJIA. Values are falling in part due to a hawkish FED and the coming U.S. Congressional Midterm elections. As of now, it is anyone’s guess to which direction these markets are headed by New Year’s Eve. However, the action will be hot and opportunity afoot as traders digest a litany of fundamental market drivers.

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About the author

Shain Vernier is our US Analyst
Shain Vernier has spent over 7 years in the market as a professional futures, options and forex trader. He holds a B.Sc. in Business Finance from the University of Montana. Shain's career includes stretches with several proprietary trading firms in addition to actively managing his own accounts. Before joining FX Leaders, he worked as a market analyst and financial writer.
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