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Talking Points:

- European equities have seen quite a bit of volatility already this week as driven by Italian politics, and that theme may continue to push stocks in the near-term as resolution does not yet appear to be in-sight. American bourses were closed yesterday in observance of Memorial Day, and after gapping-lower this morning, a bit of support has started to show.

- The Dow gapped-down to a key area of support around 24,522, which is the 23.6% Fibonacci retracement of the post-Election move in the index. This is also the bottom of the box formation that we looked at last week, and a down-side breakout exposes a series of prior price action swings from earlier-May price action.

- DailyFX Forecasts have been updated for Q2, and are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.

US Equities Gap Down on European Political Risk

Kicking off this week has been global equity weakness, led by European bourses as markets wrestle with another bout of political risk. American markets have not ignored this theme, as gaps began to show upon this morning’s open, as yesterday marked a holiday across US exchanges in observance of Memorial Day.

In the Dow Jones Industrial Average, prices gapped-down to the area that we were looking at for near-term support, helping to demarcate the ‘box’ that had built-in around last week’s price action. This area of support is produced by the 23.6% Fibonacci retracement of the post-Election move in the Dow, and so far this morning that level is helping to hold the lows after prices gapped-down to start this week’s trade.

Dow Jones Four-Hour Chart: Gap-Down to Fibonacci Support

Dow Jones Four Hour Chart

Chart prepared by James Stanley

As we wrote last week, prices breaking-below 24,500 opens the door for bearish strategies, and given the price action that we’ve seen thus far this week, that scenario remains viable. A deeper downside break, and a bearish breakout through the 24,500 level opens the door for targets at prior swings of 24,405, 24,320 and 24,181.

Dow Jones Two-Hour Chart: Bearish Breakout Targets Prior Price Action Swings

Dow Jones Two Hour Chart

Chart prepared by James Stanley

On the bullish side of the Dow, traders would likely want to see prices climb back-above, and substantiate some sort of bullish price action above last week’s support around 24,630. That level held up fairly well throughout last week, being taken-out only after this week’s US equity open, and this could remain as relevant for those looking to trade a topside bias. If prices are able to move back-above last week’s support, and then are able to find some element of higher-low support around this level, the door can be opened for bullish strategies, looking for prices to trade back into last week’s range after this week’s gap-through support.

What this also means is that until that happens, this level can be looked to for stop placement on short-term bearish strategies.

Dow Jones Hourly Chart: Prior Support 24,630 as Current Resistance

Dow Jones Hourly Chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX