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Dow Jones: Fear and Greed Index Signals a Drop to $26,000 Possible

Dow Jones
Dow Jones

Dow Jones futures are crawling back after shedding more than 500 points yesterday. The index is up by 0.12% and trading at $26,843, which is slightly higher than the intraday low of $26,640. S&P 500 futures are also up by 0.10% while Nasdaq 100 is down by more than 0.23%. At the same time, the fear and greed index has fallen below 50 for the first time in weeks.

Risk to the market remain

The Dow Jones is rising even as the risks in the market remain. For one, the number of COVID-19 cases in Europe has been rising. In the United Kingdom, the government has been forced to put new circuit breaker policies to prevent the disease from spreading. The number has also continued to rise in other European countries like Italy and Spain. This is a bad thing for the Dow Jones because most of the constituent firms do a lot of business in the region.

Meanwhile, back home, the political environment has continued to worsen. In an interview yesterday, Donald Trump refused to say whether he will concede the upcoming election if he loses. He has also raised questions about the accuracy of the election results because more people will be voting by mail. All these issues lead to significant challenges for the US economy.

At the same time, the US dollar has gotten relatively strong. The dollar index, the benchmark that measures the strength of the dollar, is up by more than 0.10%. This increase is mostly because of the COVID cases and signs that other countries have started to weaken. A stronger dollar is usually negative for the Dow Jones because it makes items of key exporters more expensive. Still, analysts at UniCredit believe that the strength of the dollar will not last long.

Also, the Dow Jones is rising even after Fed officials warned about the state of the economy. In a speech and interview, Fed’s Jay Powell and Richard Clarida warned that the country was still in a big hole. They both requested for more fiscal support, which is unlikely in the current environment.

Fear and greed index moves below 50

Interestingly, the decline of the Dow Jones and other indices has changed the sentiment in the market. The fear and greed index, which is a tool developed by CNN Money has moved from 72 a month ago to 46. Levels above 50 usually signal that the market is getting greedy while those below 50 send a signal of fear.

In most times, investors tend to remain in the fear zone for a few weeks or months. Therefore, I suspect that the Dow Jones and the S&P 500 will continue falling as the fear and greed index gets extremely “oversold”.

Fear and Greed Index

Dow Jones technical outlook

The daily chart shows that Dow Jones futures have been under pressure. The index has moved below the ascending green trendline. It has also moved below the 50-day and 25-day exponential moving averages and the 78.6% Fibonacci retracement level. Therefore, I suspect that the index will continue falling as bears aim for the next support at $26,000.

On the flip side, a move above $28,000 will mean that there are more bulls remaining in the market. That will see it rise to the previous highs above $29,000.

Dow Jones daily chart

Dow Jones