Technical Analysis

Dow Jones futures (YM) rally ahead of CPI report

  • Inflation report later today will likely dictate price action for the remainder of the week.
  • Analyzing how the triangle pattern is providing three possible setups.

The triangle pattern

Last week we analyzed the triangle pattern that is forming on YM. Take a look at it here.

The price is currently trading right at the top of the triangle, and so this gives us a possible high-risk reward ratio trade but it does not have a high probability of success. The offset, however, is the reward can be as high as 3 times the risk.

The reason the risk is high is that the CPI report is coming out later today or may be out already, depending on when you read this article. Bullish news could most certainly send the Dow breaking out of the triangle, shooting for new all-time highs shortly after.

Three setups going into the release

Bull Trade: The bullish trade here is for those who think the CPI report is, once again, going to be a bullish one, and so traders could set buy stop orders above $34,400 with stops below $34,000. The market could react violently, so be aware of the potential risks involved and be prepared to accept the fact you might get whipsawed.

Bear Trade: Traders who are bearish can initiate shorts before the report in the expectation that the resistance (on the chart below) is too strong for bulls to push through. Stops for this trade would be $34,000 and targets the bottom of the triangle at $33,600.

Adept Trade: Traders who prefer to not have a view on the direction can set buy stops at $34,200 in case of a bullish break and wait to see how the report is digested. If it is not as bullish as people expected, the buy stop can be canceled, and the trader can short at current prices, setting a stop loss to exit the trade at $34,200 instead.

YM Daily chart showing triangle pattern
YM Daily chart