The Dow Jones Industrials Average started the day almost exactly flat with yesterday’s close, giving little guidance to the highly risk-sensitive US Dollar and Japanese Yen through early New York trade. Yet the key stock market index currently trades important support levels, and a break lower could easily force major moves in Dollar and Yen pairs. The correlation between the Dow Jones and the Japanese Yen remains at its strongest levels in at least 20 years, and the Yen will likely continue to trade lock-step with the key US stock market index.
An examination of shorter-term price action shows that the Dow Jones trades very close to the bottom of its recent trading range, and a break below 8,000 leaves little in the way of noteworthy support until 7,500. Said support line likewise coincides with a much longer-term price floor for the Dow Jones—emphasizing the importance of upcoming stock market price action.
The chart below shows that the Dow currently trades almost exactly at the bottom of its 10-year trend channel, and a break lower would likely lead to a move towards 2003 lows at 7,400. Such an occurrence would likewise confirm that the 10-year uptrend in the Dow has “officially” ended, and it would likely mark a larger shift in risk sentiment. It will be important to watch short-term price action in the Dow Jones—especially as it relates to longer-term trends.
Written by David Rodríguez, Quantitative Analyst for DailyFX.com