Dow Jones at Risk of Trading Lower on Profit Taking

Today, the Dow Jones is trading slightly lower ahead of the cash open. There is no doubt that the long-term trend is upwards since the index bottomed out from 21621 on December 26, 2018, and last week when the price approached the important August 23 low of 25268, investors bought the index.

In the short-term, the outlook is neutral to bearish. Last week, the Dow Jones declined firmly on weaker than expected US ISM and Services PMIs but was saved by an ok Non-Farm payroll report. However, as mentioned last week, before the rise in the index, the labor market report tends to be a lagging indicator. It could, therefore, be a matter of time before the NFPs catch up with the PMI indices, and the leading indicators are not improving; as reported earlier today, leading Eurozone Sentix index dropped to new multi-year lows, and suggests a weaker European economy.

In the US, investors will focus on the upcoming US-China trade talks; however, before they have even resumed, reports are out saying that the Chinese government will not be as flexible as anticipated, and there is a high probability that tariffs on China imports to the USA are increased once more on October 12. Talks are set to start on Thursday with Vice Premier Liu He to meet Lighthizer and Mnuchin.

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The threat of an economic slowdown and an escalation of trade wars should keep volatility in the Dow Jones index high. As for the technical levels, the Dow Jones is resting just below the September 24 low of 26702, and following the surge on Friday’s NFP report, the index is at levels where short-term traders probably will book profits on their long positions. If the index trades into the 26700 to 26871 intervals, I anticipate that some aggressive bearish traders will short-sell with stops above the October 1 high of 27069 for a test of the phycological level of 26000, followed by last week’s low of 25743. Between the August 28 low at 25630, and the 26000 level, I suspect bullish traders will try to build a bullish exposure. However, if the August 28 low does not hold as support, then Dow jones will probably try to reach the next support level, the August 23 low of 25268.

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Dow Jones Chart

Dow Jones Chart

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