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Can The Dow Jones Hold On To Recent Solid Gains?

Published 02-11-2022, 06:11 pm
Updated 11-03-2024, 04:40 pm
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  • Federal Reserve unlikely to pivot
  • Dow has failed to hold breakouts above 200-day in 2022
  • Index's impressive rally means bears require confirmation
  • Speculation that the Federal Reserve might shift to a less hawkish stance has been one of the main reasons we saw a sizable recovery in US stock markets last month. But not everyone is convinced the US central bank will change tack.

    So, if the Fed does pivot, which I think is unlikely at this meeting, the markets may rally a little bit more. But the bigger risk is that the Fed will disappoint these expectations and thus trigger another sharp sell-off in risk assets today.

    Thus, it is worth waiting to see what the Fed decides before potentially trading these markets, although we have seen a bit of selling pressure coming back into the markets.

    While, from a bearish point of view, it makes more sense to watch the underperforming Nasdaq, and technology stocks, even the mighty Dow Jones might come under pressure after its impressive recovery in October. It had its best month since 1976 in October, with a gain of almost 14%.

    The rally was led by banks, which tend to benefit when interest rates are on the rise. Oil stocks like Chevron (NYSE:CVX) also helped power the markets higher, for obvious reasons.

    In terms of individual Dow performers, the likes of Amgen (NASDAQ:AMGN) (+20%), Honeywell (NASDAQ:HON) (+22%), McDonald's (NYSE:MCD), Merck (NYSE:MRK), The Travelers Companies (NYSE:TRV), IBM (NYSE:IBM), and Caterpillar (NYSE:CAT) did really well with the latter enjoying a gain of over 31% on the month. However, the technology heavyweights, except IBM, underperformed noticeably. This is why the gains for the Nasdaq only amounted to about 4% in October.

    But is the Dow going to pull back at least a little from here?

    Dow Jones Daily

    As you can see from the chart, the Dow has struggled every time it has tried to hold above the 200-day average this year, with resistance this time coming in around 32,700-33,000.

    In addition to the 200-day, we have the 50% retracement of the entire 2022 down move converging with the bearish trend line around the same area, making it an even more interesting zone for traders.

    We have already seen some signs of fatigue at the start of this week, but this is hardly surprising given the big rally on Friday of last week and ahead of the FOMC decision today. These are tentative bearish signs, nonetheless.

    For now, Dow futures have been able to hold above the 200-day and short-term support around 32421.

    To be more certain that the index has potentially peaked here, we will need to see some confirmation. For example, a drop below Friday's large bullish candle (highlighted at 31884) will put the bulls in a spot of bother.

    As well as the Dow creating those tentative bearish signals, there were several bearish engulfing candles printed on Tuesday on Dow components such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), American Express (NYSE:AXP), Salesforce (NYSE:CRM), Walmart (NYSE:WMT), and 3M (NYSE:MMM).

    In truth, a lot will now depend on the Fed, and whether it will decide to pivot or at least open the door to a downshift. This will have a big say in terms of the very short-term direction of stock prices. Over the longer term, I continue to maintain a negative bias towards equities, for now, due in part to growth concerns over China and the very high levels of inflation around the world hurting consumer spending.

    Disclaimer: The author currently does not own any of the instruments mentioned in this article.

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