Earnings optimism gives the Dow a strong finish, tilts technicals

Sign up for IG's Daily and Weekly Market Report to receive this information and more, in an elaborate and comprehensive report recounting the forex majors, commodities and indices before the European open.

US data late last week was fixated on retail sales, which defied expectations of contraction to rise by 0.7% for the month of September, adjusted for inflation giving it a net real increase with better growth at its core which excludes automobiles. Other economic data included producer prices that were a miss but still rising, import prices up 9.2% year-on-year at a time when the US is suffering from a record trade deficit, UoM’s preliminary consumer sentiment reading failing to match estimates for a third consecutive month, unemployment claims falling below 300K, and Empire’s manufacturing dropping significantly though still in positive territory.

Earnings thus far has enjoyed an optimistic start with a strong average beat thus far from financial heavyweights (including components of the Dow like Goldman Sachs which outperformed sizably on Friday), and putting markets in a more risk-on mood. It was quiet on the monetary policy front meaning the US Federal Reserve’s (Fed) minutes and relatively hawkish central speak took most of the attention, fiscal policy of less relevance for now with the debt default deadline pushed until December.

As for the week ahead, relatively low-impacting compared to recent weeks when it comes to economic data for the US, housing data scattered throughout the week with NAHB’s (National Association of Home Builders) survey of home builders regarding current and future single-family home sales tonight, building permits and housing starts tomorrow, mortgage applications on Wednesday, and existing home sales the day after that preceded by the usual Thursday unemployment claims. For the Fed, there’s its ‘Beige Book’ regarding current economic conditions. On Friday, preliminary manufacturing and services PMIs will be on offer for plenty out of Markit, areas suffering from an energy crisis in focus to see how it’ll impact their respective sectors, the US relatively immune and in turn expected to enjoy growth in both.

And then of course, earnings season continues with Netflix and Tesla on offer this week, and a whole lot more covering a wider range of sectors that have had to contend with larger logistical issues and rising costs that may have a more impacting negative effect than what we’ve seen for the financial sector, and for the Dow index’s components: Johnson & Johnson, Proctor & Gamble, Travelers, IBM, Verizon, Dow, Intel, American Express, and Honeywell International Inc.

Dow Technical analysis, overview, strategies, and levels

For the Dow, technical boxes shifted with a positive DMI cross occurring on the daily, and where it has managed to average back up towards the highs at last, in the process conformist breakouts easily outperforming on the daily late last week with a breach of daily 1st Resistance levels, on the weekly one apiece for contrarian buy-on-reversal off its previous 1st Support level and conformist buy-breakout off of its previous 1st Resistance level outperformed, while one apiece failed for sell-breakout and sell-on-reversal strategies that attempted to go opposite recent positive momentum.

But with more positive technical boxes, it hasn’t taken away from its current weekly technical overview below that’s ‘consolidation – volatile’ where levels have been at risk of being broken in both directions (and more so on the daily where levels are more short-term) even if eventually consolidating back to an average. Keep in mind that with increased volatility and levels will automatically widen meaning it’s in need of persistent increases in volatility, especially where it incorporates more short-term historical data like the daily time frame.

IG client* and CoT** sentiment for the Dow

Prices gains have meant retail trader longs have gotten enticed into closing out while shorts initiate, and what was majority short 59% at the start of last week has risen into heavy sell territory to start off this week at 71%.

CoT (Commitment of Traders) speculators remain majority short, albeit now in slight sell territory dropping from 55% to 53% on an increase in long positions by 1,447 lots outdoing an increase in shorts by 500 lots. For the other key US indices they are majority short Russell 2000, have shifted to the middle in the Nasdaq, and are majority buy S&P.

Dow chart with retail and institutional sentiment

^{*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.}

^{**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.}