Dow Jones Index Technical Forecast: Bearish
- The Dow Jones stock index hit an all-time high of 31,188 before entering into consolidation
- The index broke an “Ascending Channel” with bearish momentum, pointing to a deeper pullback
- A 10 percent correction will lead to a test of the 61.8% Fibonacci retracement level at 28,100
The Dow Jones Industrial Average reached its all-time high of 31,188 on January 20th and entered a consolidative periodthereafter. The formation of a long bearish candlestick hints at strong selling pressure as a result of heightened market volatility. The index appeared to be overstretched after surging nearly 20% from early November to the end of January, rendering it vulnerable to a technical pullback when profit-taking kicked in.
The index broke below its 20-Day Simple Moving Average (SMA) and pierced through the lower bound of the “Ascending Channel” formed since early November. This hints at a near-term trend reversal and may open the door for further downside potential with an eye on 30,070 (23.6% Fibonacci retracement) for support.
Drawing a Fibonacci Retracement between the December low of 26,137 and the January peak of 31,188 helps to define potential support levels that price may arrive at in the weeks to come should we see a deeper pullback. The 61.8% Fibonacci retracement level, which is at 28,100, may be closely eyed as potentially strong support.
A shallow technical pullback may end up with a 5% decline while a more meaningful correction could see with a 10% retracement from the peak. The Dow Jones experienced two technical corrections in September and late October, falling 9% and 10% respectively (chart below). Interestingly, if the current correction ends up with a 10% drawdown from the all-time high, it will arrive at 28,100 – the 61.8% Fibonacci retracement.
Near-term momentum appears biased towards the downside, as suggested by MACD divergence. The indicator trended lower while price edged higher, showing depleting upward momentum.
Dow Jones Index – Daily Chart
On the weekly basis, the Dow Jones index pocketed an astonishing gain of 71% from late March 2020 until the end of January 2021(chart below). The overall trend remains bullish-biased, with recent consolidation potentially paving the way for higher highs. Both the 10- and 20-Week SMA lines are trending higher, suggesting that the medium-term bull trend remains intact.
Price remains well above the middle Bollinger line (20-Week SMA), which may serve as an immediate support level. The MACD indicator is about to form a bearish crossover, underscoring that momentum has likely turned bearish and more volatility is perhaps on the way.
Dow Jones Index – Weekly Chart
--- Written by Margaret Yang, Strategist for DailyFX.com
To contact Margaret, use the Comments section below or @margaretyjy on Twitter
