Chart of the Day: What Now for the Dow After 1200-Point Rally?
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- Bulls eye small pullback to consolidate gains
- Fed likely to step down on aggressive hikes, but talks of pause premature
- Bears need complete reversal of Thursday’s rally to re-establish control
US index futures extended their gains yesterday as optimism about falling inflation extended into a second day. That’s not to say it will be smooth sailing from here. The weakening inflation data certainly points to the Fed stepping down on their aggressive rate hiking stance, but inflation still needs to come down a lot more before they even discuss pausing hikes. It is important not to pin all your hopes on just one inflation report. There are many other risks that could derail the rally.
After a massive rally on Thursday, a bit of consolidation would do the bulls no harm in the next few days, while the bears will want to see a quick drop in the Dow and other US indices to re-establish the bearish trend.
Dow Jones Daily
Thursday’s rally ensured that the Dow not only held but closed well above the 200-day moving average. There were some concerns that the index would turn lower from there after its recent sharp recovery, but the bulls prevailed—for now—thanks to the softer inflation data.
But after a 1200-point rally, the Dow is understandably fatigued, and we shouldn’t expect much further upside continuation without a pause or a pullback first. The prospect of a complete bearish reversal is also there, but for that to happen, we will need to see the Dow go back below 200-day and thus give back its entire sharp gains from Thursday. It could still happen in the next few trading sessions, but we will cross that bridge when, and if, we get there.
For now, it is all about whether the short-term support levels hold, and how much of a pullback we should be expecting?
Well, Dow futures have reached and breached the 61.8% Fibonacci level against the all-time high after Thursday’s powerful rally. Interestingly, there’s a bit of negative divergence on the Relative Strength Index (RSI) near the ‘overbought’ levels of 70. For this momentum indicator to work off its ‘overbought’ conditions, the Dow rally will need to at least pause for a while (which is what the bulls would like to see) or retreat sharply (which is what the bears want to see).
The key support range that needs to hold now, in light of Thursday’s big rally, is around 33,225 to 33,366, which is also where the upper side of the broken bearish trend line is. For as long as this support area holds, the bulls will be happy.
However, if the outlined support range breaks down then there will be the risk of a bearish reversal, or at least the potential for the Dow to drop back to retest the 200-day average in the days ahead.
In any case, the last line of the sand is now around 32,450 for the bulls, which is where the 200-day average is residing now. The bears have a bit of wood to chop if they are to re-establish their grip on this market. A small pullback will not cut it.
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