Dear trader, dear stock market friends.
With a closing price of 41,175 points, the Dow Jones closed last Friday just a few points below its all-time high of 41,198 points, which was reached on July 17. The rapid price slump between August 1 and August 5 was followed by a very rapid V-shaped recovery.
Jerome Powell's speech creates a positive mood
Since the start of the most recent price rally in the first week of August, the Dow Jones has only known one direction and has risen directly to the old all-time highs virtually without interruption. Concerns about a possible recession, which were triggered by weak labor market data, appear to have been exaggerated from today's perspective and optimism has quickly returned in the last two weeks. On Friday, the rally in the Dow received a renewed tailwind after the eagerly awaited speech by US Federal Reserve Chairman Jerome Powell at the annual Federal Reserve meeting in Jackson Hole.
In his speech, Powell signaled that it was time to adjust monetary policy and possibly start cutting interest rates in September. He emphasized that the Fed will now pay more attention to the risks of a rise in unemployment, as inflation has been brought under control. Although the market had already assumed in recent weeks that the first rate cut would take place in September, the clear communication from Powell once again helped the market from a psychological perspective, particularly the clear commitment to focus on the labor market and the statement that the fight against inflation had been successful and could be considered complete, so to speak.
Labor market data should continue to be monitored
This paves the way for a longer period of interest rate cuts in the coming months and years, provided inflation does not return surprisingly quickly. According to the CME FedWatch Tool, a rate cut of 25 basis points is currently being priced in for the Fed meeting on September 18. However, if the non-farm payrolls published at the beginning of September are again very weak, a rate cut of 50 basis points could also occur.
Developments on the US labor market are likely to continue to attract a great deal of attention in the coming weeks and months. If the data published in August from the previous month of July was just a one-off blip, there is a very good chance that the upward trend in the Dow Jones will continue. If, on the other hand, very weak data is reported again, the Fed is likely to be somewhat more aggressive in cutting interest rates, but the increased risk of recession could once again weigh on the stock market. The Non Farm Payrolls are published on the first Friday of each month.
New all-time high on a weekly closing price basis
The following weekly chart shows that the upward trend in the Dow Jones is unbroken and that a breakout on the upside is imminent. On a weekly closing price basis, the Dow Jones has already reached a new all-time high. Last week's closing price is also slightly above the upper Bollinger Band and both the upper and lower Bollinger Bands are opening, which is a sign of an increase in volatility and suggests that there is a high probability that the trend will continue after a possible breakout.
Dow Jones Index weekly chart
The daily chart (below) has also brightened considerably. The sideways trend between March and the beginning of July was followed by an upward breakout. The first pullback to the breakout level followed immediately, whereupon the Dow was able to rise further in the days that followed. However, the price subsequently fell back into the old sideways range at the beginning of August and corrected to 38,500 points before moving up again.
In the meantime, the Dow Jones has risen above the downward trend line (the connection of the daily closing prices of the last two local highs) and has thus generated another important bullish signal. The moving averages also confirm the uptrend and signal increasing bullish momentum. (The EMA 20 in purple is above the EMA 50 in green and the distance between these two EMAs is widening).
Dow Jones daily chart
However, anyone thinking of jumping on the upward bandwagon should bear in mind that the risk/reward ratio is not very favorable at the moment. As the Dow Jones has risen very quickly in the last two to three weeks and is overbought in the short term, a correction cannot be ruled out. If there is a pullback to the downward trend line or to the EMA 20 or EMA 50 area, the chances of a subsequent renewed upward movement are good.
If the Dow continues to rise directly this week, we can also wait for a pullback to the breakout level at around 41,200 points in order to trade the trend or the upward movement at the second attempt out of the correction. The fact that September is seasonally one of the weakest months for the stock market and that the end of September and beginning of October are seasonally one of the best times to enter the market also speaks in favor of this approach.
Author: Tobias Schmid
Date: 26.08.2024
