With Indexes at New Highs, Watch for This Key Price Pattern to Develop
Here's what investors need to ponder now that the Fed has been pushed into a corner.
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Following an in-line CPI report on Thursday, the DJIA, the S&P 500, and the Nasdaq are trading at new all-time highs. The driving force for the market strength has been the anticipation of a series of rate cuts by the Federal Reserve.
The most interesting aspect of this action is that economists and most of institutional Wall Street have been wrong about the impact of tariffs and the level of inflation. Despite predictions of disaster, there have been only limited upward price pressures.
Not only was Wall Street wrong about inflation, but the data being used to measure the strength of the labor market was wildly wrong as well. The combination of overstated inflation predictions and understated employment data has pushed the Fed into a corner, and they now must give the market what it wants, which is lower interest rates.
A more immediate question for market participants to ponder is whether the very recent strong momentum can continue. As I’ve written often, strong markets tend to stay sticky to the upside. They don’t just suddenly collapse and go straight down. Broad market strength creates an ample supply of dip buyers that will provide immediate support. Many investors do not like to chase strength in extended markets, but they will buy very shallow pullbacks.
As far as price action goes, the main thing I will be watching for at this juncture is a blow-off top. The market has had a steady diet of good news for a while now, but keeps finding reasons to keep trading higher. At some point, the good news will be fully discounted, and additional buying will slow, leading to a pullback.
The primary thing I am watching for now is an intraday reversal and a weak close. That will be a technical warning that some profit-taking may gain traction. While a reversal and collapse are highly unlikely, a reversal and choppy action are very possible.
There is some slight weakness early Friday morning as investors await consumer sentiment data at 10 a.m. ET.
At the time of publication, Rev Shark had no positions in any securities mentioned.
