Dow Jones vicious rally can continue according to the fear and greed index
The Dow Jones is having a time of its life. The index has gained by more than 200 points in the futures market. This means that the index has gained by more than 41% since the bottom in March. While these gains are good, the fear and greed index is warning that greed has returned to the market. Similarly, Citi’s panic vs euphoria index is warning that the market is in euphoria levels.
Fear and greed index points to greed
The fear and greed index is a useful tool developed by CNN Money to measure activity in US stocks. The index looks at the demand for safe havens, put and call options, market volatility, demand of junk bonds, and market momentum. The index usually moves from 0 to 100. A move above 50 usually sends a sign that there is greed in the market.
At the height of the coronavirus pandemic, the fear and greed index was less 20 because investors were extremely fearful about the market. However, as the stocks have risen, the fear and greed index has been on an upward trend. It has now moved closer to 60, which is at the greed level where it was before the previous crash.
Still, while the fear and greed is pointing to greed, it does not necessarily mean that the Dow Jones is about to crash. Indeed, in the past, the index has moved to the extreme greed level. As I wrote yesterday, there is more money held by money managers and in money market funds that could help boost the prices.
On the daily chart, the Dow Jones is in the third straight day in the green. It is now trading at $25,987 even as the fear and greed index continued to rise. The price is above the 100-day and 50-day exponential moving averages. It is also above the 50% Fibonacci Retracement level. Therefore, the index will continue to rally as investors attempt to retest the 78.6% retracement level at $27,000.
On the flip side, a move below $24,400 will invalidate this prediction. This price is along the 50-day EMA.