The CNN Fear and Greed index has soared to new multi-month highs as the Dow Jones Industrial Average continues to break new records, trading well above the 28,500 mark this Monday. The index is now at the 92 mark (out of a possible 100), indicating that the market is now in a state of extreme greed.
An understanding of the market cycles according to the Dow theory indicates that at times when the markets are approaching a peak, extreme greed is at play as a result of mass participation of unsophisticated investors.
The CNN Fear and Greed index is a composite of about 6 stock market price gauges, which are combined to measure the prevailing sentiment in the market. It can therefore serve as a guide to know at what stage a major trend is in, which gives an indication as to when the institutional investors have started to get fearful and when the mass retail participants are getting greedy.
This indicator has been able to track the price movements of the Dow Jones with a great degree of accuracy in the last three months. About a year ago, the reading of the index was 3, with extreme fear pervading the markets. This fear was from the retail participants, who largely sat at the side or were actively selling while the institutional investors were accumulating (i.e. buying). At that time, the Dow Jones Industrial Average was trading at 21,799, having come off a V-shape major correction from a double top. This was a retracement to the 38.2% level, traced from the August 24, 2015 swing low to the double top swing high of September 17, 2018.
Having seen a full year of sustained uptrend (albeit with at least three medium-term corrections), the Dow is now close to all-time highs and the greed is at its most extreme levels this year.
Outlook for Dow Jones Using the CNN Fear and Greed Index
Technically speaking, the RSI is still a little shy of overbought levels on the daily chart, and the Andrew’s Pitchfork shows that the index has breached the trendline at 28166 that served as the resistance to further upside in November 2019. The Dow Jones is therefore on course to target what I feel could be the next resistance somewhere around the 28775, with an error of + or – 50 points.
On the flip side, 27765 and 27535 (12 July to 25 July previous highs as well as Dec 3 low) could be potential downside targets, if a corrective selloff is strong enough to breakdown the 28166.4 price level.