Stocks Could Continue Lower as Tariff, Dollar Risks Remain

Traders can expect more volatility this week following President Trump's tariffs on Chinese goods and the strengthening of the U.S. dollar.

President Trump announced a 25 percent tariff on $50 billion worth of Chinese goods that contain "industrially significant technologies" last Friday, which many experts believe could mark the beginning of a trade war between the U.S. and China. The White House indicated that it would impose tariffs on aerospace, robotics and machinery in response to the "unfair practices related to the acquisition of American intellectual property and technology." China has threatened to retaliate with its own tariffs on soybeans, meat, whiskey, airplanes and cars.

At the same time, the Federal Reserve announced a widely expected interest rate hike on Wednesday but signaled that two more rate hikes were on the way this year. That's one more rate hike than many economists were expecting to see this year – and the dollar index responded by moving nearly one percent higher over the course of the week. Traders could see a continuation of dollar strength moving into this week, which could continue to take a bite out of export-driven sectors and emerging market equities. (See also: The ECB Just Crushed Emerging Markets.)

S&P 500 Could Break Down from Key Support

The SPDR S&P 500 ETF (NYSE ARCA: SPY) briefly reached prior highs over the past week before moving lower to retest trendline and R1 support levels at $257.87. Traders should watch for a breakout from trendline resistance toward R2 resistance at $282.01 next week, but a more likely scenario is a breakdown lower to retest reaction highs and the 50-day moving average at around $270.00. The relative strength index (RSI) is approaching overbought levels at 63.41, and the moving average convergence divergence (MACD) could see a near-term bearish crossover.

Industrials Hit the Hardest by Tariff Concerns

The SPDR Dow Jones Industrial Average ETF (NYSE ARCA: DIA) experienced the sharpest decline last week since it's the most susceptible to trade war risks. After DIA broke down from trendline and R1 support at $251.37, traders should watch for a further breakdown from trendline support at $247.50 toward the 50-day moving average or pivot point support at $242.74. The RSI appears modest at 56.78, but the MACD could see a bearish crossover in the near term.

Tech Stocks Remain Relatively Insulated

The Invesco QQQ Trust (NASDAQ: QQQ) did well last week, as tech stocks have been relatively insulated from political risks. After seeing a breakout from an ascending triangle, traders should watch for a move toward R2 resistance at $178.81. If the index moves lower, traders should watch for a breakdown from trendline support that could lead to a move back down to trendline support at $171.00. The RSI appears overbought at 70.63, but the MACD remains in a bullish uptrend, which suggests that traders could see some consolidation next week before a move higher. (For more, see: Why Techs, Banks May Outperform in a Trade War.)

Small Caps Continue to Outperform

The iShares Russell 2000 ETF (NYSE ARCA: IWM) remains one of the top-performing major indexes as small caps continue to experience capital inflows. Traders should watch for a sustained breakout from R1 resistance at $167.54 and a move toward R2 resistance at $172.30 next week, although the overbought RSI reading of 71.05 suggests that there could be some near-term consolidation. The good news is that the MACD remains in a bullish uptrend that could signal an ongoing rally.

What's Next?

Next week, traders will be closely watching several key economic indicators, including existing home sales on June 20, jobless claims on June 21 and the PMI Flash Composite on June 22. The market will also be keeping a close eye on the ongoing political risks facing the United States and European Union. (For additional reading, check out: Trading Trump: Reading Past the President's Tweets.)