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Another Near-term Selloff?

A couple of events today triggered another stock market selloff. Earlier in the day, the European Central Bank (ECB) announced plans to raise interest rates by a quarter-point as early as July. The bank also hinted at the possibility of a more than 25 bps rate hike in September but will depend heavily on the future inflation outlook. The European Consumer Price Index gained 8.1% year-over-year in May. Economists also expect the inflation rate not to decline too much in the next reading as they look for around 7.5%.


Markets are also increasingly concerned about the release of the May U.S. Consumer Price Index tomorrow. Economists expect an 8.2% year-over-year increase or slightly lower than the 8.3% increase for April. The market and the Fed will scrutinize the inflation data to see if inflation is indeed peaking and beginning to slow.


Inflation fears and concerns over whether the tight monetary policies will lead to slower economic growth and an economic contraction continue to weigh on consumer confidence and investor risk sentiments. The bulls are hoping for a more subdued CPI reading tomorrow. Also, lower interest rates and a slowdown in the price of crude oil would help relieve worries. But that could be difficult to accomplish until Ukraine/Russia geopolitical tension subsides.


S&P 500 Index declined 2.4%, Dow Jones Industrial Average fell 1.9%, and Nasdaq Composite tanked 2.8%. Market indexes were only modestly down during the day, but after 3 p.m. began to plummet sharply lower into the close.


Technically speaking, selling accelerated into the last hour of trading after the violations of trading supports. When the major stock market indexes fell below these pivotal trading supports, bullish traders stepped back from buying as the bears took control of the market. Once these technical support zones broke, stop-loss sell orders exacerbated the selling pressure.


Unfortunately, the sell-on rallies mentality resumed today as the lack of buyers coupled with deteriorating market sentiments opened the door for another round of selling. The negation of short-term bullish flag patterns disappointed bullish investors looking for breakouts.


Since the primary trend is down, it is difficult to know when the buyers will return with conviction. That opens the door to more losses and the continuation of the prevailing downtrend over the near-to-medium term.


This year the violations of support levels have been common occurrences in the stock market. The main culprits for the persistent selling remain higher inflation, rising interest rates, Fed’s policy mistake, recession fears, weak consumer confidence, and poor investment sentiments.


Enclosed are updates to stock market indexes, including potential downside targets to the S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), and Nasdaq Composite Index (COMPQ).


Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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