Yesterday, FXCM's Dow Jones Industrial Average CFD, the US30, dropped 3.85%. Today, the index is also down pre-cash open. This selldown highlights the inherent risk in the market due to heightened uncertainty. Therefore, be aware of bounces as they might manifest as bear market rallies. In this regard, key resistance levels are of particular importance as short-sellers may target these.
Further to yesterday's article, we note that the H4 stochastic is now under 20 (blue arrow). This weakness is dangerous, as it suggests strong momentum to the downside. If the indicator maintains these levels, the index will be under more selling pressure. In this scenario, the measured move target of 30,000 become more probable.
Bear market rallies build on the hope that the bottom is behind us but collapse as market participants realise the inherent risks are still alive. The catalyst here was the retail results, notably Target's earnings release, which reiterated the current uncertainty in the current market climate. The signal is one of stagflation.
Moreover, this uncertainty is compounded by the Fed. On Tuesday, Jerome Powell reaffirmed the central bank's resolve to bring inflation down to target. But, of note, the Fed Chair admitted that "there could be some pain involved to restoring price stability."
The VIX, which measures the S&P 500's expected volatility, is insightful here. It hasn't pushed the extremes of previous bear markets, generally a reading greater than 40. This level is often the sign of the last stage of capitulation. I.e., there still may be a round of panic selling before we reach risk market lows and value.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.