Dow Jones Talking Points:
- US stocks continue to sputter near support, and the most positive thing that can be said at the moment is that sellers haven’t yet been able to make much progress below the 25k level on the Dow Jones Industrial Average.
- Q3 was a very bullish period for the Dow, with the index rising by as much as 12.4% from the late-June low to the early-October high. But Q4 has brought a change-of-pace, and while equity markets appeared resistant to threats from rising rates or Italy/Europe throughout last quarter, warnings of higher costs ahead from tariffs appear to have caught attention, and this has added to the negative backdrop surrounding global risk markets at the moment. Will warnings of rising costs due to tariffs be the snowflake that creates the avalanche? Or are equity markets going to watch prices sit on support until some positive driver avails itself to resume the prior bullish trends?
- 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.
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Dow Jones Drops Back to 25k
US equities continue to trade near three month lows after last week’s build of higher-low support fell flat. Yesterday brought another fresh wave of selling and the Dow briefly touched-down to a fresh three month low before buyers came-in to push prices back-above the 25,000 level. This was the support looked at two weeks ago, and also of interest in this area is the 200 Day Moving Average, which currently projects to just above the psychological level at 25,150.
Dow Jones Daily Price Chart: Testing Confluent Support at 25k, 200 DMA, Trend-Line
Chart prepared by James Stanley
Caterpillar Beats, But Warns of Tariff Impact
We’re now well into earnings season in the US and a number of Dow components have already reported. Of particular interest to current dynamics was yesterday’s earnings call from industrial bellwether Caterpillar, which beat on both top and bottom lines. But – the company warned of rising material costs while also saying that they were anticipating increasing prices next year to compensate for tariff-related cost increases, and this warning really seemed to grab the attention of market participants as a few hours later the Dow was probing a fresh low.
Dual Threats of Rising Tariffs, Rates Add to Global Wall of Worry
As recently as a few weeks ago, market participants appeared unfazed by the current trade war, or even the prospect of higher tariffs down the road. This can be evidenced from all of the Dow Jones, Nasdaq 100 and S&P 500 hitting fresh all-time-highs no more than a month ago.
That theme of equity strength was so strong through Q3 that the threat of higher rates appeared to carry little weight; and this strength was even able to offset worries around Europe, Italy and Turkey as stocks just continued to march higher despite a litany of building risks, even though US markets are clearly in a rising rate cycle (which has traditionally been a hindrance to long-term bullish runs in stocks).
But – now that markets have some element of confirmation that tariffs are bringing actual impact to US corporates, there may be snowflake causing the avalanche scenario as just another factor of worry now needs to be taken into consideration. The Fed does not yet appear ready to back down. Nor does President Trump with the ongoing discussions around trade policy: So it would appear as though equity markets have found themselves to between a rock and a hard place; and given recent price action in the Dow, it would appear that projects to around the 25,000 level on the index.
Dow Jones Two-Hour Price Chart: Lower-Highs Past Week, Sellers Dig into Support
Chart prepared by James Stanley
Dow Moving Forward
The item of comfort for bulls is the simple fact that the sell-offs haven’t yet been more severe. The price action from two weeks ago was downright threatening over a two-day stretch; but since then, there’s been an attempt to build balance as bulls and bears slug it out down near three-month-lows.
This could quickly change, as any of the aforementioned risk items finding some element of clarity or optimism could remove a bit of pressure from the matter. But until then, the bias would appear to be on the downside for the Dow as the ‘wall of worry’ that’s built around global markets may be too tall to climb until some catalyst avails itself.
But – on that note of strategy: As discussed in the past few Weekly Technical Forecasts, equity bears may be better served by focusing their approach outside of the US, at least for now. The pressure points in Europe have been flagging bearish conditions for the better part of the past two months, and the DAX just moved down to another fresh 18-month low. If there is going to be a larger equity sell-off, then markets would likely see some element of correlation amongst equity indices and picking on these particularly weak areas of the market may prove to be a more amenable approach.
DAX Weekly Price Chart
Chart prepared by James Stanley
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX