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Dow Jones analysis for March: prices to remain volatile

By David Becker

As the uncertainty surrounding the coronavirus continues, what do the charts suggest?

The Industrial Average gapped lower on Monday, March 16, despite the Fed holding another extraordinary meeting and cutting interest rates by 1 per cent. The Fed’s action initially created panic and the Dow Industrials gapped down through support levels. The uncertainty surrounding the coronavirus continues to weigh on riskier assets. Additionally, the initial manufacturing survey released in the US paints a very ominous picture.

The Fed cuts rates to zero

The Federal Reserve in an emergency action, cut interest rates to zero. This action can have ramifications for savers for an extended period. Recall, the last time the Federal Reserve cut rates to zero, they remained at that level for 7 years. Additionally, investors got a first look at how the coronavirus was impacting US economic data. The New York Federal Reserve reported that its Empire State Manufacturing Survey showed that the index of business conditions fell to its lowest level since 2009. This comes as the Mayor of New York City announced that all bars and restaurants will now only be able to provide delivery and pick up service.

Weak economic data in China: will it hit the US?

Sobering data that was released in China shows what the US should expect in the coming month. The economic figures for February were much worse than expected. Industrial output fell 13.5 per cent. Retail sales were off 20 per cent, and fixed asset investment plunged by 24.5 per cent. Unemployment, which was at 5.2 per cent at the end of 2019, jumped to 6.2 per cent in February. With more than 800 million people working in China that means approximately 8 million people lost their jobs.

Dow Jones technical analysis

The technical picture for the Dow Industrial Average is bleak, but prices are oversold. The Relative Strength Index (RSI) tumbled down to the 23 level. This is the lowest level on the weekly RSI since 2009. In fact, over the past 11 years, the RSI has not moved into oversold territory. Reading below 30 on the RSI is considered oversold while readings above 70 are considered overbought. The current reading of 23 means that prices are oversold and this could foreshadow a correction.

Momentum is negative as the weekly MACD (moving average convergence divergence) generated a sell signal in early March and has tumbled to the lowest level since 2009. The trajectory points to lower prices, as the MCAD histogram prints in the red with a downward sloping trajectory that points to lower prices.

Prices sliced through the 200-week moving average, which is now seen as resistance near 23,635. Support is seen as the top of a range that was created by price action during the period from 2014 to 2016. The top end of the range is seen near 18,324, which is currently target support for the Dow Industrial Average.

Dow Jones index analysis: the bottom line

For the balance of March, there is little fundamental information that will drive the Dow Industrials. The Fed still has the quantitative easing bazooka, but the markets are looking for fiscal stimulus now. Prices are oversold, and they can stay oversold for a while, but the Dow is likely to consolidate, as the repricing of stocks now points to a significant recession. Look for prices to remain volatile, and eventually bounce from current levels.

FURTHER READING: US stocks fall 12 per cent – the worst drop since 1987 crash

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

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