Dow Jones 30 Trading Strategy: Forecasting the Trend

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China, PBOC and New QE?

Recent selling across global equities that forced the leading indices such as the Dow Jones 30 and FTSE100 to post moderate losses raised severe questions amongst market analysts, are we in front of a global recession?

When an economic slowdown is noted in China, which is one of the world’s largest economies, investors are pricing the possibility of a ripple effect that will spread into other economies. When the economy is contracting businesses may import less goods from overseas, which will affect businesses that are heavily relying on China such as Australia for example. The People’s Bank of China (PBOC) recent actions were aimed to increase exports as the local currency (the Yuan) has been devalued. The effectiveness of the PBOC intervention in the Forex market will be measured within the next 60 days.  It is therefore possible that if China was the key reason for the selling in global equities it will not surprise us if economic figures from China will gradually improve within the next quarter.

We would like to clarify why many analysts including ourselves predict this is the beginning of a long-term bearish correction.

Dow Jones 30 Bearish Breakout

This is the technical reason why many analysts predict more losses are due for US equities.

DJ30  Breakout Weekly Chart

Please click on the chart to enlarge:

Dj30 Breakout Weekly Chart 23/08/15

Dj30 Breakout Weekly Chart 23/08/15

The uptrend that has supported the DJ30 since 2011 has been violated, which suggests a shift in momentum or a trend reversal in simple words. What has probably catalysed the selling are concerns the Fed will not hike rates in September as we have indicated on multiple occasions throughout our research and updates.

The recent weakness unfolds two opportunities in the market. Either attempt to capitalize over the corrective gains that often take place after heavy selling or wait for a higher price in order to join the downtrend resumption. In order to concrete our entry we turned into the European indices and discovered the following.

DAX30 Monthly Chart

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DAX30_Monthly_Chart_23_August_2015

EUSTX50 Weekly Chart

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Euro Stoxx 50 Weekly Chart 23/08/15

Euro Stoxx 50 Weekly Chart 23/08/15

It appears that the recent dip may be corrective before a resumption of the uptrend. At the time of this writing it appears to be limited to European indices but it would not surprise us if the corrective gains in the US markets will be more than just a temporary retracement.

The only scenario in which we see a recovery in global indices while ensuring the US Dollar (USD) remains weak are speculations of a new Quantitative Easing (QE) program by the Fed. Yellen has been with Ben Bernanke throughout the financial crisis and is fully aware on how QE speculations have the power to contain the weakness in US equities. Bearing in mind there is no technical entry to short European indices and the possibility for a retracement to last week’s losses all suggest a long trade should be considered.

We are not considering to execute multiple trades in the market as we have little desire of incurring a high exposure to global indices. After analysing the charts we have decided to focus on the DJ30 and CAC40.

DJ30 Trading Strategy

We are focusing on the Dow Jones 30 weekly chart for our technical analysis.

DJ30 Weekly Chart

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DJ30 Weekly Chart 23/08/15

DJ30 Weekly Chart 23/08/15

As you may see there are multiple support levels that may contain the weakness in the Dow Jones 30. The nearest support level is at market price (approx.), 16,630, 15,670 that may be supported by the 200 Moving Average (MA) in blue by the time it is tested. The most attractive level is the long the DJ30 at market price as the protective stop will is relatively tight while offering a decent Risk Ratio (RR) on the position. Nevertheless there is little evidence that indicate the current support will in fact hold. Even if the index gaps lower at the opening of the markets bear in mind it is a weekly chart and a recovery may be seen by the end of the week. Entering the Dow greatly depends on how the markets will open.

If the entry is well-timed there is a possibility the trade will be in a fair profit within a short period of time. We will have to time our entry via intraday time frames, which is why we must wait for the opening of the markets.

CAC40 Trading Strategy

For the CAC40 we are displaying the monthly chart although an entry may also be derived from the weekly chart.

CAC40 Monthly Chart

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CAC40 Monthly Chart 23/08/15

CAC40 Monthly Chart 23/08/15

The CAC40 monthly chart shows the recent dip may be corrective before a resumption of the uptrend. Strong support is noted at 4,530 that contain the weakness that has plagued the index. Even if 4,530 is breached by the market the only scenario where the potential resumption of the uptrend will be negated is at a monthly close at 4,154. Should we decide to enter a long trade in the CAC40 we will not be layering the stop below 4,154 but instead opt for a tighter stop via intraday time frames. A 350 points stop in the CAC40 is completely unjustified.

To conclude our analysis, the European indices appear to be more technically supported than US indices at the time of this writing. There is a possibility European indices may correct higher than US indices but we highlight this is an early assumption. The broader outlook is bearish but for the short-term a technical retracement appears to be the most likely outcome that we may capitalize on.

We highlight that any bearish gaps in the opening will not negate our analysis. If we will be able to locate an entry we will send you an email with the trade alert’s details. We are unlikely to issue trades on the DJ40 and the CAC40 unless we opt for the Dow and immediate profits are seen that allow us to substantially reduce our market exposure.

We repeat that what may be the fundamental trigger for the retracement are speculations on a fresh QE, possibly by the Fed.

DJ30 Trade Alert Details (24/08/15)

Entry: Market price (16,392)
Take profit: 17,364
Protective stop: 16,248
Risk Ratio (RR): 1 : 5 (approx.)

24/08/15 UPDATE: DJ30 triggered the protective stop loss order we have set for the trade. We have deliberately used a tighter stop and it appears our decision was wise as the index shed over +1,000 points in today’s session. We will wait for the weekly or monthly close to consider a re-entry as a spike was possible as we explained in this strategy. The loss was absorbed by our long trades in EURUSD and GBPNZD.

The Dow shed over 1,000 points and recovered  1,000 points (approx.). We did not experience any slippage as the trade was stopped out before the ‘chaos.’

Please click on the chat to enlarge:

Dow Jones 30 Daily Chart 24/08/15

Dow Jones 30 Daily Chart 24/08/15

This is an indication High Frequency Trading (HFT) accounts were involved that accelerated the spikes in the Forex market as well. We believe it will soon be discussed over the financial media