US stocks pulled back slightly this week as investors remained concerned about the global economy. The blue-chip Dow Jones index retreated for the past three days straight, ending a strong comeback that started in October. It was trading at $33,573, which was slightly below this month’s high of $34,530. Similarly, the S&P 500 and Nasdaq 100 indices have also retreated.
The bull case for the Dow Jones
There are several reasons why I believe that the Dow Jones and its DIA ETF will continue doing well in the coming months. First, there are signs that inflation is getting controlled. It dropped to 7.7% in October after peaking at almost 10% earlier this year.
Recently, the price of gasoline has crashed to the lowest level in more than a year while crude oil prices have dropped below $80. Supply chains have also improved while the labor market is strong, as evidenced by rising wages.
Second, the US dollar index has pulled back in the past few weeks. A closer look at the DXY index shows that it has plunged from $115 to about $106. As a result, many companies like Microsoft and Apple that were hit by the strong US dollar will see a positive reversal this year.
Third, the Federal Reserve will likely slow the pace of interest rate hikes in the coming months. Analysts expect that the bank will hike interest rates by 0.50% next week, lower than the recent increases of 0.75%. Therefore, a change of tune will likely be a positive catalyst.
Another catalyst for the Dow Jones index will be the potential recession. A recession, while bad for the economy, tends to be a positive thing for American stocks since it usually leads to Fed easing. We saw that during the Covid-19 recession and the 2008/9 Global Financial crisis.
Meanwhile, the fear and greed index has moved to the greed level. This performance has been helped by the extreme greed of the stock price strength, stock price breadth, and put and call option.
Dow Jones forecast 2023
The other catalysts for the Dow Jones are technicals. A close look shows that the index has formed what looks like a cup and handle pattern. In price action analysis, this pattern is usually a bullish sign. At the same time, the index has formed a golden cross, which is usually a positive sign.
Therefore, the index will likely continue rising as buyers target the key resistance level at $36,956. This is an important price since it was the highest level on January 4. A drop below the support at $32,500 will invalidate the bullish view.
