Today, the Dow Jones is up sharply as some investors took profits on short positions, and other traders bought the oversold shares. Central bankers, like the Fed, came out on Friday in support of the markets, and today, the Bank of Japan did their part. A move higher has also been suggested by the Fear and Greed index, and today it remains in “Extreme Fear” levels, which indicates that the Dow Jones might keep on rising in the days ahead.
Dow Jones Bounces in the Face of Terrible China Data
A definite sign the market had overreacted to the last few weeks of negative news, was the inability of the Dow Jones to trade below Friday’s low on the inferior China PMI figures published over the weekend.
The China Manufacturing PMI for China and large companies slumped to 35.7 vs. the 46 anticipated, and 50 prior. The reading was the lowest ever and is due to people not being able to work because of the Coronavirus crisis and subsequent lockdown of about 50 million people in China. A reading below the 50-level suggests that the sector is contracting. Yet, despite the very weak reading, stock markets failed to trade lower as trading opened for the new week.
One reason for this could be that the negative news is in the short-term already priced into the markets, as suggested by the CNN Fear and Greed index. Also, the Federal Reserve, and now the Bank of Japan have been vocal about supporting the markets. In Italy, the government has unveiled a program to support the economy.
At the time of writing, the Fear and Greed Index, which spans from 0 to 100, was at 12, indicating that the move upwards we see in the Dow Jones might extend for a few more days, and possibly weeks ahead. The longer-term outlook depends on how the US and Europe manage the spread of the Coronavirus. As it looks right now, the situation could deteriorate as there is little support to close the borders in Europe, or for people to self-isolate, and unless the growth rate of Italian coronavirus cases slows, Europe could see a significant amount of new cases in the next few weeks.
Technically, the Dow formed a Pin-bar on Friday, as the price found support just above the June 2019 low of 24590. The Pin-bar is a bullish candle, and as long as the price trades above the Pin-bar low, and the June 2019 low, the Dow might clawback 38.20% to 50% of its losses from the 2020-high. The 38.2% and 50% levels are 26611, and 27206 respectively.
In the short-term, the volatility is set to remain high, and it would not surprise me if the Dow was to revisit the 24590 to 25200 interval before heading higher. However, on a break to the June low, the Dow Jones might try to reach the January 14, 2019, low at 23730.