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Dow Jones analysis for March 16 to 20: the index will remain volatile and a drop below 20,000 is likely

By Rakesh Upadhyay

How should you approach the markets and what do the charts predict?

Last week, the Dow Jones Industrial Average (DJIA) ended the longest bull run in history, which lasted for 11 years. Traders were in for a crazy roller coaster ride as panic gripped them due to the fast-spreading coronavirus and volatility surged to the highest levels since the financial crisis.

On March 12, the index had one of its worst falls since 1987 but on the very next day, the index came roaring back, clocking its biggest rally since the financial crisis. In this highly uncertain volatile environment, how should traders approach the markets and what does the weekly and daily chart of DJIA predict for this week? Let’s find out.

Dow Jones technical analysis: weekly chart

The analysis of the DJIA weekly chart shows that within four weeks, the index has given up all the gains it had accrued since September 2017. Last week, the index plunged below the December 2018 lows of 21,685.

While this is a negative sign, the only respite is that the index pulled back from the lows and did not close at its lowest level. However, the index is not out of the woods yet as any negative news is likely to attract further selling.

If the bears sink the index below last week’s low of 20,376, the decline can extend to 18,800 level. If this level also cracks, the next support will be at 15,400.

However, the current fall has already pushed the RSI deep into the oversold territory, which suggests that the selling has been overdone in the short term and a relief rally is likely. Any pullback could face stiff resistance close to 25,000 and above it at 26,000 levels, which correspond to 50 per cent and 61.8 per cent Fibonacci retracement levels of the most recent fall from the lifetime highs.

The trend of the DJIA weekly chart is clearly down but is oversold, therefore, a pullback cannot be ruled out. Let’s analyse the DJIA daily chart to see the possibility of a relief rally and the critical levels to watch out for.

Dow Jones index analysis: daily chart

Both the 20-day EMA and the 50-day SMA are sloping down and the RSI is close to the oversold territory, which suggests that bears are firmly in command. The 50-day SMA and the 200-day SMA are on the verge of a bearish crossover, which is also known as the death cross.

Though the index pulled back sharply on March 13, it is likely to face stiff resistance at the 20-day EMA. If the price turns down from the 20-day EMA, the bulls will again attempt to resume the downtrend.

During a strong downtrend, the pullbacks only last for about one to three days. The first sign of a change in trend will be when the index breaks out and sustains above the 20-day EMA. we spot a developing bullish divergence on the RSI.

Though the price has been making new lows, the RSI has not dropped to lower levels. This usually indicates that a pullback is around the corner but without the follow-up price action trades should not be taken on this set-up alone.

The DJIA analysis of the daily chart also shows that the trend is firmly down and the bears are in command. So, how should the traders position themselves for this week?

DJIA prediction this week: March 16 to 20

As the trend is clearly down, traders should avoid initiating long positions until a bottom is confirmed. It is also not advisable to short at the current levels because the index looks oversold in the near term.

Traders can wait for minor rallies to the 20-day EMA to fizzle out before initiating short positions. However, as the volatility is high, we suggest trading with a small position size of about 30 per cent of usual. Traders who are averse to short selling can stay on the sidelines and wait for the bottoming process to be over before buying.

FURTHER READING: Which investments are the best during a recession?

FURTHER READING: S&P 500 technical analysis for March: volatility is continuing to rise

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