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Will Dow Jones Completely Retrace Brexit Collapse?

Will Dow Jones Completely Retrace Brexit Collapse?

Jeremy Wagner, CEWA-M, Head of Education

Talking Points

-Dow Jones (DJIA) reclaims nearly all of the post Brexit losses

-Sentiment (SSI) signal grows more bullish

-If a break above 18,167 occurs, move risk up to 17,148

A 2 day sell off of nearly 6% from last Friday to this Monday in the Dow Jones Industrial Average has led to a Brexit bounce reclaiming most of the collapse. In a week where the world witnessed a historic vote and many were fearing the worst, the fear appears contained. It was a vote of confidence (or lack thereof) by the people of UK in the EU experiment, but UK has yet to formally file the divorce papers to leave. Without a government in UK as Prime Minister Cameron resigned, the papers probably won’t be filed until a replacement government is formed which likely takes place in Q4 2016.

Therefore, at the moment, US equities don’t appear concerned about the drama in Europe. We outlined in Wednesday’s post how a break above the post Brexit high of 18,167 in US30, a CFD which tracks the DJIA, would have us continue as a strong bull. Prices are very close but haven’t quite made it to this break level.

Will Dow Jones Completely Retrace Brexit Collapse?

Sentiment, measured through live traders positioning, suggests further gains. The current SSI reading stands at -6.3 with only 14% of traders long. Long positions are 16% lower from yesterday and 23% lower against last week. Short positions are 17% higher yesterday and 124% higher against levels seen last week.

SSI is a contrarian tool where you want to do the opposite of how traders are positioning. In this case, more traders piling in short would have us lean towards a bullish breakout.

Learn more about SSI and live trader positioning here.

If a break takes place above 18,167, risk can be moved higher from 15,503 to 17,148. If prices dip back down into the 16,070-17,148 zone prior to a break higher, then that offers bulls an opportunity. Until then, we wait for price to dictate to us how it wants to play. Refer to Wednesday’s playbook for more details.

While navigating the volatile market, be mindful that leverage on trades exaggerates the markets movements. We urge low amounts of leverage or no leverage at all in these environments. (Read more about the effects of leverage in our Traits of Successful Traders research.)

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU

Follow me on Twitter at @JWagnerFXTrader .

See Jeremy’s recent articles at his Bio Page.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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