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Dow Jones Talking Points:

- A bearish theme has emerged in US equities, and the Dow Jones Industrial Average has sold off aggressively over the past week following a fresh all-time-high set last Wednesday. The pace with which these declines have come in has been respectable, as we’ve already seen a -4.3% pullback over the past week. This, however, comes after what was a very aggressive bullish trend in Q3 that saw as much as 12.4% added to the index from the late-June low up to the October-high.

- There does not appear to be a single isolated driver for this move, and the fact that this weakness in US stocks is taking place along with weakness in bonds and the US Dollar indicates that something else is going on here. Also of note – we’re currently testing the 38.2% Fibonacci retracement of the Q3 bullish trend at 25828, and this comes after resistance showed earlier in the day around the 14.4% marker of the same major move.

- DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro 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.

From Fresh All-Time-Highs to the Open of Bearish Potential

After starting Q4 in a bullish manner, quickly jumping up to another fresh all-time-high, the past week has produced a rather noticeable pullback in the Dow that’s now seen more than -4.3% of the index’s value taken-out. Considering the strength that we had coming into the quarter, this might not yet be the full call to alarm, as we were up 12.4% from the June low to the October high. But regardless of the context, the pace with which these declines have come in, combined with the fact that there doesn’t appear to be a singular or definable driver, and this move deserves attention.

Dow Jones Two-Hour Price Chart

dow jones two hour price chart djia dia ym

Chart prepared by James Stanley

Going along with this pullback, we’ve seen price action in the Dow test below a big trend-line that helped to hold support in the index since those late-June/early-July lows. Follow-thru support had showed at the 26k psychological level earlier in today’s session, but that was taken-out as well, and at this point, the index is slipping down towards fresh monthly lows.

Dow Jones Four-Hour Price Chart

Dow Jones Four Hour Price Chart DJIA DIA

Chart prepared by James Stanley

In our last article, we looked at the support area around 26k as a cut point for bullish trend strategies. And while the big picture bullish trend may not yet be completely finished, the pace of declines over the past week are compelling enough to urge caution from trying to chase that move higher at this point.

For those that do want to look for strength to return in US stocks, they’d likely want to wait for support to first settle, followed by a return of bullish short-term price action before pushing that approach. There are a number of deeper support levels on the way down to the 200-day moving average which currently resides near the 61.8% retracement of the Q3 bullish move. We’re nearing now testing the 38.2% retracement of that same study at 25,828, and a bit deeper we have a previous level of interest around 25,500 that could be of interest as this is confluent with the 50% mid-point of the Q3 trend.

Dow Daily Price Chart

Dow Jones Daily Price Chart DJIA DIA YM

Chart prepared by James Stanley

Dow Jones: The Bearish Approach

Given the rate of the recent sell-off, there’s naturally an enhanced interest in bearish approaches. As the saying goes, ‘up the stairs, and down the elevator,’ these types of pullbacks or sell-offs can produce big moves in short periods of time, and something like that will often be a point of attraction for traders.

Despite the new nature of this move, with a week of weakness after a quarter of fairly well-defined strength, and traders would still likely want to treat that approach with a good deal of caution. If this is something that’s going to develop into a legitimate reversal of the longer-term trend, we’re likely going to have a few indications of such as stocks struggle while testing resistance. So, this may not yet be the time to chase the move lower but, if we do see prices setting resistance around areas of prior support, the door can open for short-term bearish themes that could, potentially, turn into something larger should this week of weakness develop into something more.

On the below chart, we’ve added a second Fibonacci retracement in red, and this is based on the shorter-term move from the mid-August lows up to the October highs. The 50% marker here is a key point, as this indicates deeper bearish potential given that prices plunged through without so much as a pause. For traders that want to look at aggressive short-side approaches, this level could be used to look for lower-high resistance. A bit-higher, however, is a key zone of confluent Fibonacci resistance that was prior support, and this runs from 26198 up to 26291. If stocks recover to this point, and sellers come back-in to set lower-high resistance, bigger picture bearish theme could be attractive as we trade deeper into Q4.

Dow Jones Four-Hour Price Chart

Dow jones four hour price chart djia dia ym

Chart prepared by James Stanley

You may also be interested in:

The Dow Spends a Week at Support: Will Bulls Follow-Through?

Equity Forecast for Dow, S&P 500, DAX, FTSE and Nikkei

Day Trading the Dow Jones: Strategies, Tips & Trading Signals

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q3 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