Over the past few weeks, we have watched the markets continue their attempt to melt higher. Recently the Down Jones and the Transportation Index have breached a lower upward sloping support channel that suggests traders are preparing for a surprise Fed statement or a breakdown in the current bullish price trend. My team and I believe this warning sign may be suggesting the reflation trade is over. Traders believe the US Fed will soon begin to act to contain inflation by raising rates.
As we move closer to the FOMC statements and decisions related to the economy, inflation, and future expectations, the US major indexes usually move into an apprehensive sideways trend. This happens because US federal reserve decisions can have a very big impact on how consumers and corporations perceive monetary policies and future opportunities. The US markets will likely react to the US Fed statements this week with increased volatility and trend strength. If you have not already protected your trades in preparation for the FOMC comments this week, get ready for a potentially wild ride.
Fasten your seatbelts and make sure you have your “E-Tickets” ready
The Dow Jones Industrial Weekly chart below shows how price has been moving higher (melting upward) throughout the early part of 2021 and has just recently broken below the YELLOW upward sloping price channel line. It is our opinion that this move, below a key support level, may be an early indication that traders and the markets expect a policy change from the US Federal Reserve. Quite possibly, the inflationary aspect of the recovering global economy is sparking greater concern for the US Fed and they may decide to act in steps that will help curb run-away inflation earlier than expected.
We’ll know soon enough as the FOMC statement is due on Wednesday, June 16, 2021. We are expecting an increase in volatility with the potential of the FOMC comments driving a new upward or downward trend. If the Fed issues a statement where they are taking no action and don’t believe inflation is a core issue, then the markets will likely continue to move higher. If the Fed issues a statement that inflation and other concerns are big enough to warrant a surprise rate/policy change, then the markets may react to the downside.
This next Weekly Transportation Index chart highlights a similar type of price pattern. The Transports have broken below a more recent upward sloping price channel, from the February 2021 lows, and has yet to break below the major upward sloping price channel line, from the COVID-19 lows. Still, this “rollover” in the Transportation Index suggests traders are changing perspective related to future economic activities 90 to 120+ days into the future. This sideways rollover suggests traders believe the commodity rally and inflationary pricing pressure will “abate” as we move into the end of 2021.
Logically, we would expect the Transportation Index to continue to move lower if these expectations become rooted in the broad market perspective. If the Fed takes any action to help curb inflationary expectations, this downward trend in the Transports could move in a much more aggressive manner.
Are the Dow Jones Industrial Average and Transportation Index setups warning that the Fed may be backed into a corner? Are we starting to see a change in trader/investor sentiment related to the current commodity rally and/or economic activity throughout the rest of 2021? Only time will tell at this point.
What we do know is that later today, being Wednesday, June 16, 2021, The FOMC decisions and statement will likely set a tone in the markets that will drive increased volatility and trending. This could prompt some very big trends in major market sectors such as precious metals, oil, and others. Now is the time to get ready for some bigger trends that will likely last throughout the rest of 2021 and into 2022.
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Have a great day!
Chief Market Strategist