Dow Jones technical analysis | Hawkish Fed pushed DJ to key support levels

BY Janne Muta

|tháng 9 21, 2023

Dow Jones technical analysis report - The Dow Jones Industrial Average (DJ) is at a pivotal moment, according to recent our technical and fundamental analyses. After a 13.5% rally since March lows, signs of market weakness are emerging.

Fed Impact on Equity Indices

The Federal Reserve's latest policy meeting, which indicated a willingness to sustain high interest rates, has resulted in negative market reactions in all equity indices. While Nasdaq and Russell 2000 are highly sensitive to interest rates, DJ is less so. Therefore, we might see some weakness in DJ also but even more in these other indices (Nasdaq and Russell 2000).

Dow Jones at Critical Support Levels

Dow Jones technical analysis reveals that the index is trading near critical support levels, including the lower boundary of its bullish channel and the 20-period moving average. Moreover, client sentiment indicates a predominance of long positions, which may act as a contrarian indicator.

Key takeaways from this report:

  • The Dow Jones index is trading near a critical support level of 34,287. A failure to hold this level could trigger a further downside, leading to a lower swing high at 35,096. This 35,096 level aligns with the 20-period moving average, adding significance to this technical confluence zone.
  • On the weekly chart, the Dow Jones displayed a bearish shooting star candlestick pattern last week, followed by price weakness after the Federal Reserve's rate announcement. These patterns indicate increased risk of downside movement, adding weight to the significance of the support level at 34,287.
  • The 4-hour chart shows the nearest key resistance level at 34,777. If bulls manage to push prices above this level, we could see the Dow Jones trading up to around 35,000. Conversely, a breakdown below 34,287 could send the index towards 34,023.
  • The stochastic oscillator on the daily chart is currently at 18.60, suggesting that the market is nearing oversold conditions. Traders may look for buy signals around the lower boundary of the current sideways range, particularly if the market rebounds from the support level at 34,287.
  • In terms of market sentiment, 78% of TIOmarkets' clients are currently holding long positions on the Dow Jones, while only 22% are shorting. Given that retail sentiment often serves as a contrarian indicator, traders might consider this when planning their strategies.
  • The Federal Reserve's hawkish stance on interest rates has had a notable impact on equity indices, including the Dow Jones. With the federal funds rate maintained at a 22-year high of between 5.25% and 5.5%, traders should be prepared for increased market volatility and carefully watch key support and resistance levels.

The key risk events impacting this market today:

  • Unemployment Claims
  • Philly Fed Manufacturing Index
  • Existing Home Sales

Dow Jones technical analysis

Dow Jones technical analysis, Weekly Chart

Weekly Dow Jones technical analysis

After rallying over 13.5% since the low in March, the Dow Jones Industrial Average CFD (also known as DJ) is now showing signs of weakness. The market reacted negatively to the Fed's dot plots yesterday, which indicated that the central bank is willing to keep interest rates higher for a longer period.

Recent Market Weakness and Technical Patterns

However, the market was already weak during last week's trading. DJ created a bearish shooting star candle in the weekly chart last week. This was followed by further price weakness yesterday after the Fed rate announcement.

Key Levels and Risk Factors

Dow Jones technical analysis reveals how the market is now at a crucial point as it is trading near the lower boundary of the bullish channel and the 20-period moving average. With the negative reaction to hawkish news from the Fed, the risk of further downside has increased significantly.

Short-Term Projections and Support Levels

If the market fails to attract buyers either today or tomorrow, the technical outlook for the DJ index turns more bearish, which could lead to a substantial downward correction.

If the 34,287 support level doesn't hold, we have a lower swing high at 35,096. This support level coincides with the 20-period moving average, creating a technical confluence level.

Importance of Technical Confluence

Because this confluence level roughly coincides with the bullish channel's lower boundary, it is of critical importance. According to our Dow Jones technical analysis, if the market trades decidedly below this level, the market will no longer be in an uptrend and could trade down to the 33,772 level.

Indicators and Their Implications

Technical indicators such as moving averages and the stochastic oscillator still give a positive indication. The fast moving average is still above the slow moving average (the 20- and 50-period SMA, respectively), and the stochastic oscillator is near the oversold area.

Possible Scenarios and Price Targets

If the bulls can reject attempts to push the market below the 34,287 confluence area, we might see further sideways movement between the support level and last week's high at 35,013. Our Dow Jones technical analysis shows that in order for the market to turn decidedly bullish, it should trade above 35,013, after which we might see the market testing its year-to-date high at 35,680.

Dow Jones technical analysis, Daily Chart

Daily Dow Jones technical analysis

The daily chart reveals that the market was unable to penetrate a key market structure level (35,097) at the end of August. The last time we wrote about Dow Jones, the market was still trading inside the bullish price channel and had created a higher reactionary low on the daily chart.

Updated Market Status and Lower Swing High

We were bullish on this market at the time, but since then, the market has created a lower swing high near the same key market structure level (at 35,097). According to classical Dow Jones technical analysis, a market that cannot move higher is more likely to move lower.

Line of Least Resistance and Market Direction

The line of least resistance could be on the downside. If this is the case, then the market is more likely to break supports than to rally from them. Just like in the weekly chart, the Dow Jones technical analysis shows the market trading at a crucial inflection point on the daily chart.

Technical Indicators and Oversold Conditions

The lower swing high at 35,014 (last week's high) and the bearish shooting star candle from yesterday suggest the market could be ready to break below this important confluence level (34,287).

At the same time though, the stochastic oscillator is at 18.60, a level that as per Dow Jones technical analysis suggests the market is oversold in the daily time frame.

This indication is a reflection of the market moving sideways above 34,287. At the same time, however, the fast moving average is currently below the slow moving average, which reflects recent weakness.

Importance of Price Action and Ongoing Monitoring

It is crucial to follow price action around this level today and tomorrow. It is still possible that the bearish reaction to the Fed's dot plot yesterday was an overreaction. It is impossible to know this beforehand, which is why traders should always focus on price action and update the Dow Jones technical analysis on a daily and hourly basis.

Dow Jones technical analysis, 4h chart

Dow Jones technical analysis, 4h chart

In the 4-hour chart, the nearest key resistance level is at 34,777. The market is, however, moving in a sideways range and is, at the time of writing, very close to the range's lower boundary. This in terms of Dow Jones technical analysis could imply the market could attract buyers near the support.

Systematic Trading Approaches

Systematic traders tend to look for buy signals in such situations until the market has broken below the range's lower boundary. Only after the bears have shown that they are in control of the market by breaking the key support level do they start to look for short trading opportunities.

However, at the same time, we encourage our readers to employ the trading strategies that they know, through experience, work best.

Possible Market Scenarios

If the bulls can push the market above 34,777, we might see DJ trading up to 35,000 or thereabouts. Below 34,287, look for a move to 34,023.

Client sentiment graph (Dow Jones technical analysis)

Client sentiment analysis

Most the of the TIOmarkets' clients (78%) are currently holding long positions in the DJ. Only 22% of them are shorting the market.

Please remember that the retail trader client sentiment is a contrarian indicator as most of the retail traders are on average betting against the market trends. This is why, experienced traders tend to trade against the retail client sentiment. You can follow the TIOmarkets client sentiment live on our Forex dashboard.

Dow Jones Fundamental Analysis

The Federal Reserve's recent policy meeting in September 2023 has taken a notably hawkish turn. The target range for the federal funds rate has been maintained at a 22-year high, between 5.25% and 5.5%. This development, along with other economic projections, has sparked concerns over the U.S. economy's resilience and the potential for increased market volatility.

Fed Impact on Equity Indices

The Federal Reserve's latest policy meeting, which indicated a willingness to sustain high interest rates, has resulted in negative market reactions in all equity indices. While Nasdaq and Russell 2000 are highly sensitive to interest rates, DJ is less so. Therefore, we might see some weakness in DJ also but even more in these other indices (Nasdaq and Russell 2000).

Federal Funds Rate: The 22-Year High

In the meeting, the Fed decided to keep the federal funds rate at its highest level in over two decades. This target range between 5.25% and 5.5% signals the institution's intent to combat inflationary pressures, but it also raises questions about the economy's ability to withstand such elevated rates.

Dot-Plot Projections: Future Rate Movements

The Fed's dot-plot projections suggest another rate hike for 2023, followed by two rate cuts in 2024. This outlook creates an environment of uncertainty for both companies and investors. The anticipated movements in interest rates can significantly impact borrowing costs and profitability.

Please remember that, while the Federal Reserve's hawkish stance provides an overall market sentiment, Dow Jones technical analysis can pinpoint more immediate price action trends.

Revising Economic Indicators: GDP and Inflation

The Federal Reserve has also revised its economic forecasts. The projected GDP growth for 2023 and 2024 has been upgraded to 2.1% and 1.5%, respectively. These revisions align with recent economic data and suggest an optimistic view of the U.S. economy's health.

In terms of inflation, the PCE rate for 2023 has been revised to 3.3%. However, the core rate of inflation is now expected to be lower at 3.7% for the same period. These changes indicate a nuanced perspective on inflationary pressures, balancing the needs for growth and price stability.

Employment Forecasts: A Positive Outlook

The employment outlook appears more promising. The Fed has projected lower unemployment rates for both 2023 and 2024. This optimistic view is supported by recent data, such as rising manufacturing activity in Philadelphia and robust retail sales figures.

Stock Market Implications: Increased Costs and Asset Allocation

The hawkish monetary policy could put downward pressure on both stocks and bonds. Higher interest rates generally lead to increased borrowing costs for companies. This scenario could affect corporate profitability, thereby exerting downward pressure on stock prices. To gain a better understanding of market dynamics, consult our Dow Jones technical analysis report above.

U.S. Treasury Yields: A Headwind to Equities

Additionally, higher interest rates make bonds more attractive as an investment option. This potential shift in asset allocation could further pressure stock prices. U.S. Treasury yields are already at their highest levels since 2007, and any further increase could serve as a headwind to equities.

Investor sentiment currently leans towards caution. Futures markets show less than a 50% chance of another rate hike by the year's end. The market anticipates interest rates to be around 4.8% by the end of next year, below the Fed's own projections.

Divergence Projections

There is a notable divergence between the Fed's and the market's expectations. While Federal Reserve Chair Jerome Powell has expressed confidence in the economy's resilience, market participants seem to expect a quicker easing of monetary policy than the Fed currently plans.

Conclusion: The Need for Vigilance

The Federal Reserve aims to balance inflationary pressures with growth and employment through its hawkish stance. However, this approach introduces a wider range of potential outcomes, raising the stakes for market volatility.

In the coming months, careful monitoring of economic indicators and Fed policy actions will be crucial to gauge the U.S. economy's true resilience and the stock market's sustainability in a high-interest-rate environment.

It is our hope that our Dow Jones technical analysis together with the above fundamental considerations can offer our readers a structured approach to understanding market sentiment.

Read more analysis on the US economy

Read more analysis on the US economy

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The Next Main Risk Events

  • GBP Monetary Policy Summary
  • GBP MPC Official Bank Rate Votes
  • GBP Official Bank Rate
  • USD Unemployment Claims
  • USD Philly Fed Manufacturing Index
  • EUR ECB President Lagarde Speaks
  • USD Existing Home Sales
  • JPY Monetary Policy Statement
  • JPY BOJ Policy Rate
  • GBP Retail Sales m/m
  • JPY BOJ Press Conference
  • EUR French Flash Manufacturing PMI
  • EUR French Flash Services PMI
  • EUR German Flash Manufacturing PMI
  • EUR German Flash Services PMI
  • EUR Flash Manufacturing PMI
  • EUR Flash Services PMI
  • GBP Flash Manufacturing PMI
  • GBP Flash Services PMI
  • CAD Core Retail Sales m/m
  • CAD Retail Sales m/m
  • USD Flash Manufacturing PMI
  • USD Flash Services PMI

For more information and details see the TIOmarkets economic calendar.

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Janne Muta

Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.

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