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Dow Jones, S&P 500 Forecast: Traders Sell Wall Street as Fed Hikes, Will Stocks Rally?

Dow Jones, S&P 500 Forecast: Traders Sell Wall Street as Fed Hikes, Will Stocks Rally?

Daniel Dubrovsky, Contributor
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Dow Jones, S&P 500, Fed, Retail Trader Positioning, Technical Analysis – IGCS Wall Street Update

  • The Federal Reserve offered a boost to Wall Street as markets favor a pivot
  • Despite gains in the Dow Jones and S&P 500, retail traders continue selling
  • Is this a sign that further gains may come from Wall Street, or will things turn?
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Wall Street rallied up a storm despite the Federal Reserve hiking rates by 75-basis points. It seems that Chair Jerome Powell’s pivot away from a focus on forward guidance seemed to do the trick. The central bank is looking to a meeting-by-meeting basis for incoming tightening, focusing on the data. In that regard, rising fears about a recession are boosting speculation of a Fed pivot next year.

Despite the rise in the Dow Jones and S&P 500, retail traders are increasingly selling into recent price gains. This can be observed by looking at IG Client Sentiment (IGCS), which tends to function as a contrarian indicator. As such, if traders continue to sell the stock market, the indicator could hint at further gains to come from Wall Street.

Dow Jones Sentiment Outlook - Bullish

The IGCS gauge shows that about 42% of retail traders are net-long the Dow Jones. Long exposure is on the decline, dropping 10.17% and 6.02% compared to yesterday and last week respectively. Since most traders are now short, this seems to suggest further gains may come from the Dow Jones.

Dow Jones Sentiment Outlook - Bullish

Dow Jones Daily Chart

Dow Jones futures are up over 8 percent since June’s bottom, though the dominant downtrend since the beginning of this year remains intact. Recently, prices confirmed a breakout above the 50-day Simple Moving Average (SMA). That has opened the door to extending gains, placing the focus on the 100-day SMA. Taking out the latter would subsequently expose the 33169 – 33434 resistance zone.

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Dow Jones Daily Chart

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S&P 500 Sentiment Outlook - Bullish

The IGCS gauge shows that roughly 45% of retail traders are net-long the S&P 500. Since most investors are biased to the downside now, this suggests prices may continue rising. Short exposure has increased by 9.05% and 8.47% compared to yesterday and last week respectively. With that in mind, the combination of current sentiment and recent changes are producing a stronger bullish contrarian trading bias.

S&P 500 Sentiment Outlook - Bullish

S&P 500 Daily Chart

S&P 500 futures have also confirmed a breakout above the 50-day SMA, pushing higher over 10% since bottoming in June. Immediate resistance seems to be the 38.2% Fibonacci retracement at 4017, with the 100-day SMA above. The latter could hold as resistance, maintaining the broader downside focus. Otherwise, extending gains places the focus on early June highs for resistance down the road.

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S&P 500 Daily Chart

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*IG Client Sentiment Charts and Positioning Data Used from July 27th Report

--- Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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