Inflation rose less than expected in October, triggering a sharp rally in the US stock market
A falling wedge pattern suggests more upside is possible until the next FOMC meeting
The US stock market rallied since the last inflation report showed inflation might have cooled. In October, the prices of goods and services in the United States rose less than feared, triggering a rally in the stock market and a decline in the US dollar.
But given everything that happened in 2022 (i.e., Fed’s tightening cycle, Russia invading Ukraine, and supply chain bottlenecks), the question is if this recent bounce is false. Or do we have a bottom in place for the year?
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US Treasury yield curve warns of an upcoming recession
One of the most reliable leading indicators is the Treasury yield curve inversion. It compares long-term interest rates to short-term interest rates, and it is a leading recession indicator when short-term rates exceed long-term ones.
In October 2022, the Treasury yield curve inverted to its lowest point in two decades. If a US recession is just around the corner, as indicated by the inverted yield curve, companies will have difficulty performing. Hence, earnings will be negatively affected; thus, the stock market will not be attractive to investors.
Dow Jones price forecast from a technical perspective
The fundamental perspective may not be the brightest for Dow Jones, but the technical one leads to a bullish price forecast. A falling wedge pattern just broke higher after the October inflation report, offering a tempting trade from a risk-reward perspective.
The market typically retraces the entire falling wedge pattern without making a new lower low. Therefore, providing the Dow Jones does not drop below 10,500 points, the current rally may have more legs and target 14,000 points.
The Fed’s message is key here. But until the next meeting, scheduled on December 13-14, there is more than a month left.
Historically, November is not a reversal month, especially if stocks rally. As such, expect the price action surrounding Thanksgiving to remain bullish, with the 10,500 area acting like an invalidation one.
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