INDICES OUTLOOK – 5 JULY 2021

The tech-heavy NASDAQ and Dow Jones closed out last week at +2.57% and +0.75% respectively. Could the rotation from value stocks back into technology be on the cards again?

Traders were waiting in anticipation for Non-Farm Payrolls data last week Friday where we saw the actual beating out the forecasted 700k which strengthened the prospects of a US economic recovery which in turn boosted market sentiment sending stocks higher. Friday, however, also brought us the US Unemployment Rate which came in higher than the expected sending the Dollar on a short term pullback.

In terms of risk events this week, investors will be eyeing PMI data being released on Tuesday to gauge post-pandemic manufacturing levels. Jobless Claims hit the print on Thursday to continually gauge unemployment levels and the Fed will be delivering their Monetary Policy report on Friday.

FUNDAMENTALS FOR THE WEEK AHEAD

An important correlation going forward with earnings season once again approaching will be the Treasury Yield Curve. A hawkish shift in the Fed’s policy stance could flatten the yield curve which would in turn send technology stocks higher. The flattening yield curve makes tech stocks look more appealing when front-end borrowing costs rise faster than the longer-end rates.

This leaves the Dow Jones more vulnerable to a rapid rise in near-term rates. Companies like McDonald’s, 3M and Coca-Cola will be affected as higher short-end borrowing costs make these dividend-paying stocks look less attractive during an ultra low interest rate era. Looking at the chart below, we can see the Yield curve has been flattening creating Lower Lows and Lower Highs underpinning bearish momentum. Should 1.5% hold as resistance going forward, this could be the catalyst for the rotation to start.

10 TREASURY YIELD CURVE DAILY TIMEFRAME

Looking at NASDAQ technically, most of its momentum has been due to investors pricing in optimism for the upcoming earnings season due to a decent economic data releases showing a slow recovery within the US economy. With the reflation trade put on pause, the rotation back into tech might mean NAS takes back the crown of the leading US index.

At the time of writing, NAS looks to be pulling back slightly after once again making a new ATH last week. With price trading so high, we can expect a technical correction to take place before seeing a new leg to the highs. For the week going forward, we will be waiting for price to fall into one of our Fibonacci retracement levels in line with a previous level of resistance turned support. An interesting inflection point is around the Aspire Profit Pocket which lines up with the psychological level of $14 500 as well as the 50 Day Exponential Moving Average to act as dynamic support to potentially take price into the $14 800 region. A break below the $14 500 level would constitute short term bearish momentum with price then potentially targeting the Prior Weekly Low around $13 350.

NASDAQ 4 HOUR TIMEFRAME

Looking at the Dow, it has been on a bull run since price collapsed during June with the flattening of the yield curve. Since price is bullish, creating Higher Highs and Higher Lows, the bias still remains long. For the week ahead, pullbacks into one of our Fib retracement levels could provide high risk to reward positions should this momentum continue. Should price manage to break below our most previous swing low ($34 150 region), that could be our first clue into a potential reversal back into the downside invalidating long positions.

DOW JONES 4 HOUR TIMEFRAME

As always traders, exercise healthy risk management and we hope you have a fantastic trading week ahead. For more updates like the one above, subscribe to our blog for instant updates to your mail or join our Telegram Trading Floor via our website at http://www.aspirefx.co.za.

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