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Nick Goold

Technical analysis

Last week started quietly leading up to US CPI release on Thursday. The yearly September CPI inflation figure was +8.2% which was 0.2% higher than expected. Immediately the Dow plunged to touch the lows of 2022 as the market changed their forecasts for interest rate increases for the rest of the year.

Support held, so buyers aggressively entered the market pushing the Dow surprisingly back above 30,000. Resistance at October’s high held firm, sellers returned and Friday’s close was below 30,000 again. This week, we expect range trading conditions to persist as there are few important economic releases. The medium trend is still pointing lower, so looking for selling opportunities might be the best strategy this week.

In current market conditions short term trading is the most attractive strategy. Day trading with a 5-minute chart allows traders to find trend and reversal patterns. As short-term volatility remains high, you should set your target at least two times larger than your stop.

Daily NY Dow with 10 day moving average

Resistance:30000, 30500, 31500, 32000, 32650, 33000, 34000

Support:27500, 26500

The impact of inflation on the Dow

2022 has seen inflation increase around the world and especially in the US. Inflation is when the prices of goods and services rise in an economy. The below shows the yearly US inflation rate over the past 25 years.

In 2022 US inflation has increased much more than expected, negatively impacting the Dow (down around 20% this year). Below is a list of reasons inflation can be bad for equity values.

1. Lower consumer demand

Consumers can lose confidence when there are rising prices of goods and services. It can take time for consumers to adjust to higher prices, which can hurt company sales.

2. Lower company profits

Higher inflation leads to lower profits for companies as they need to pay more to make their products. In the short term, a company’s profits can suffer as it can take time for a company to increase prices.

3. Higher interest rates

Central banks increase the official interest rate to prevent higher inflation when inflation is high. Higher interest rates increase company costs and make investing in the stock market less attractive.