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Dow Jones plunges as a “rich uncle” with $232 billion goes shopping

Dow Jones
Dow Jones

The Dow Jones index nosedived for the third straight day today. The index is down by more than 700 points as investors focus on the Federal Reserve interest rates decision. Other main indices in the US also dropped, with the S&P 500 and Nasdaq falling by more than 1.50%.

Fed gave the market what it wanted

Surprisingly, the Dow Jones is down even after the Federal Reserve gave the market what it wanted. In the monetary policy decision, the bank left the main lending rate unchanged at 0% and extended the asset purchases. It will now buy assets worth more than $120 billion in form of treasuries and mortgage backed securities. In addition, the bank expects the rates to remain low for about 2 more years. This is what the market wanted.

Instead, Dow Jones investors are focusing on the language used by the Fed. For example, the bank expects the high rate of unemployment to continue. It also expects the economy to contract by more than 7% this year. However, these estimates may be wrong. For example, the unemployment rate dropped from the previous 14.8% to 13.3%. This happened even before the economy reopened fully.

What’s more? The Fed has been wrong more than 80% of the time in the past.

A big investor prepares to spend

As I warned yesterday, the Dow Jones will probably drop more because euphoria and greed have returned in the market. Look at Hertz, he bankrupt car rental company that many investors have been buying. The fear and greed index and other technical indicators have also moved to the overbought level.

Meanwhile, a moneyed investor with more than $232 billion is seeking deals in the United States. According to Bloomberg, Mubadala, the Abu Dhabi sovereign wealth fund is seeking deals mostly in the United States. It will join other moneyed funds like those from Saud Arabia and Norway in purchasing companies that have been undervalued.

At the same time, in Washington, debate is still going on about whether more stimulus is needed. If implemented, it will be the fifth round. The first round was worth $8.3 billion followed by another one worth $105 billion. The second and third one were worth $2.2 trillion. The final one was worth $3 trillion.

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Dow Jones technical outlook

The Dow Jones is trading at $26,145, which is significantly below this month’s high of $27,615. On the daily chart, the index is forming a three black crows pattern, which is usually a sign that the bearish trend will continue. It has also moved below the 78.6% Fibonacci retracement level. This means that the pair may continue falling as bears attempt to test the 61.8% retracement level at $25,256.

On the flip side, a close above the 78.6% retracement level will invalidate this prediction because it will mean that there are more sellers in the market.

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