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Dow Jones Soars as Wall Street Takes Solace in Powell’s Remarks. Now What?

Dow Jones Soars as Wall Street Takes Solace in Powell’s Remarks. Now What?

Diego Colman, Contributing Strategist

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DOW JONES OUTLOOK:

  • Dow (DJI) surges and erases all of Tuesday’s losses
  • Risk assets gain on news that Fed Chair Powell favors a measured interest rate increase at the March FOMC meeting instead of a supersize hike
  • Geopolitical tensions remain high and continue to be a wild card

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Most read: S&P 500, Nasdaq Outlook - Stocks at Risk as Rally Hits Resistance

After yesterday’s sharp sell-off, U.S. stocks rebounded vigorously on Wednesday, supported by impressive private sector employment data, but more importantly by Fed comments indicating that policymakers will be prudent amid heightened geopolitical tensions in Eastern Europe. In this context, the S&P 500 jumped 1.86% to close the day at 4,386, while Dow Jones surged 1.79% to 33,891, a rally that allowed the blue-chip index to erase all of Tuesday’s losses.

In an appearance before Congress, FOMC Chair Powell stated that he is inclined to propose and support a 25 basis points rate increase at this month’s policy meeting, effectively nuking the debate that the institution would initiate liftoff with a supersize hike. While Powell acknowledged that the bank may move more aggressively if inflationary pressures do not abate, he also stressed that the central bank would proceed with caution amid elevated uncertainty about the implications of the Ukraine war on the U.S. economy.

The Federal Reserve cut interest rates to near zero in 2020 to cushion the negative effects of the coronavirus pandemic, but there is now a broad consensus that the U.S. economy is well placed to withstand higher borrowing costs amid red-hot inflation and a tight labor market.

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In any case, Powell's statements suggest that while there is a desire to begin exiting the ultra-loose policies, there is little appetite among policymakers to withdraw stimulus too forcefully, at least for now, due to fears that a steep normalization path could trigger a hard landing. That said, the possibility of a gradual tightening cycle may bolster risk appetite and lift equities in the near term, provided that the Russia-Ukraine crisis does not escalate in the coming days and weeks.

In recent days I argued that localized military conflicts only tend to hurt investor confidence for a short period of time before giving way to strong rebounds. I stand by this view today. When the dust settles and sentiment recovers, stocks that have fallen too much on geopolitics may be well positioned for strength.

Looking at the Dow Jones (DJI), the value-oriented index could outperform its peers (S&P 500 and Nasdaq 100), but this argument assumes that the economy will grow at a good pace this year. To figure out where we are headed, traders should keep a close eye on the February nonfarm payrolls report due out on Friday (NFP). If the jobs numbers show momentum, investors will be less concerned about the outlook, setting the stage for what could be a strong rally in the Dow Jones.

Wall Street Bearish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 14% -6% 3%
Weekly 7% -7% -1%
What does it mean for price action?
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DOW JONES TECHNICAL ANALYSIS

From a technical perspective, the Dow Jones rallied on Wednesday, but failed to clear a key resistance near the 34,000 psychological level, an area defined by the 38.2% Fibonacci retracement of the 2022 decline. For buying interest to increase and bullish sentiment to continue, we would need to see decisive move above this barrier in the coming sessions. If this scenario materializes, the Dow will have fewer obstacles to head towards 34,622 (50% Fib level).

On the flip side, if sellers return and trigger a reversal, support is seen at 33,125, but if price falls below this floor, the blue-chip index could be on its way to retest the yearly low at 32,272.

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DOW JONES INDUSTRIAL AVERAGE TECHNICAL CHART

Dow Jones Chart prepared in TradingView

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---Written by Diego Colman, Contributor

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

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