U.S. equities retreated on Monday but finished the day off their lows as dip buyers emerged to blunt the sell-off that initially triggered a sharp pullback in the most speculative corners of the market, such as tech and long cash-flow duration stocks.

At the closing bell, the Dow Jones (DJI) fell by 0.45% to 36,068, while the S&P 500 (SPX) declined 0.14% to 4,670. Elsewhere, the Nasdaq 100 (NDX) erased a 2.7% plunge and managed to climb 0.14% to 15,614 as U.S. Treasury rates came off their highs.

During the session, the U.S. 10-year yield briefly jumped to 1.80%, its highest level since January 2020, accumulating a 28 basis points increase in six days. Rising nominal rates are a headwind for tech and growth shares with exorbitant valuations, but it becomes a problem for the broader market when the magnitude of the short-term upsurge is rapid and more than 2 standard deviations above the mean, which is what we are witnessing now.

In the coming days, Wall Street is likely to stay on the defensive as traders continue to hedge against downside risk amid ongoing monetary policy repricing in the face of soaring inflation, driven partially by supply chain snags.

Focusing on inflation, the U.S. Bureau of Labor Statistics will release the latest Consumer Price Index report on Wednesday. Analysts expect December headline CPI to accelerate from 6.8% y/y to 7.1% y/y, its fastest pace since 1982. A hot print will to raise wagers that the Federal Reserve will withdraw accommodation more quickly and aggressively than initially anticipated to tackle mounting inflationary forces. At the moment, investors see the Fed lifting borrowing costs three times in 2022, but a fourth hike, along with quantitative tightening (balance sheet runoff), are slowly creeping into expectations. Bets on a steeper normalization path will put upward pressure on the Treasury curve, fueling cross-market volatility and hurting expensive stocks trading at rich multiples.

In the current environment, technology and growth plays will struggle and remain biased to the downside, but the value-oriented segment is likely to stabilize and begin to command strength once nerves cool and the dust settles, especially if the economy performs as expected and expands above potential. Value stocks are typically more cyclical in nature and gain when bond yields rise, as long as the moves are measured. All of this suggests that the blue-chip Dow Jones is well-placed to outperform the Nasdaq 100 and S&P 500 in the coming weeks and months.

DOW JONES TECHNICAL ANALYSIS

The Dow Jones hasn’t been immune to the ongoing sell-off on Wall Street, with the index correcting lower in the last few days after reaching an all-time high last Tuesday. Following the recent pullback, the price is approaching channel support near 35,500. Traders should keep a close eye on this technical zone, as a move below it can reinforce the bearish momentum and pave the way for a test of the 200-day simple moving average at ~34,850.

On the other hand, if buyers regain control of the market and the Dow turns higher, the first resistance to watch out for can be seen at 36,200. If bulls manage to reclaim this level, the next upside target appears at 36,550 and then at 36,935, the index’s record.

DOW JONES TECHNICAL CHART

(Click on image to enlarge)

Dow Jones Chart prepared in TradingView