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Strong US inflation prompted deep selloff in DOW and strong rise in yield

US stocks tumbled sharply overnight after the big upside surprise in consumer inflation reading. Technically, while the pull back in stocks was deep, there is no threat to the up trend yet. However, the simultaneous strong rise is 10-year yield is worth a note. Correction in stocks could extend much deeper depending on the power of 10-year yield’s next move, after break through 1.765 resistance level.

A short term top should be formed in DOW at 35091.56 with a break of 33687.01 support. The index should gyrated further to 55 day EMA (now at 33221.06) and below. But we’d still expect strong support from medium term channel at around 32500 to contain down side and bring rebound. Overall up trend from 18213.65 is expected to continue and resume at a later stage.

The strong of yesterday’s rally in 10-year yield suggests that it could finally be ready to resume the medium term up trend. Focus would now be on 1.765 resistance for the coming trading days. Firm break there will extend the rise from 0.504. Next target is the resistance zone between 1.971 and 61.8% retracement of 3.248 to 0.398 at 2.159. For now, we’d expect strong resistance from there to limit upside. If that’s the case, we won’t expect drastic reversal in stocks. However, it would be another story if this 1.97/2.16 zone is taken out firmly.

 

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