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Nick Goold

Technical analysis

The Dow started last week oversold following a poor performance in September. Buyers entered the market aggressively on Monday and Tuesday following weaker-than-expected US economic releases. Traders hoped a weak economy would result in smaller official US interest rate increases. Resistance at 30,000 proved too much as US 10-year interest rates rose again. Friday’s US employment figures were strong, resulting in a fall at the end of the week.

This week should be quiet until Thursday as the 10-day moving average indicates sideways conditions, and there are no important economic announcements. On Thursday, US inflation figures, and Friday, US retail sales and consumer confidence figures are announced. Last week’s rise was on small volume, so US equities are still vulnerable to further falls in the medium term.

Short-term trends are strong, so it is dangerous to go against the market. There are many trading opportunities where the potential reward is 2 to 3 times or more than the potential risk. Traders who can be patient for short-term volatility to rise again this week will be able to find both long and short trading opportunities.

Daily NY Dow with 10 day moving average

Resistance:30000, 30500, 31500, 32000, 32650, 33000, 34000
Support:27500, 26500

Why the Dow is an attractive market to trade

The Dow Jones index is down 20% in 2022, following a rise of 7% in 2020 and 19% in 2021. The coronavirus outbreak in 2020, saw the Dow crash as fears of economic decline impacted the markets. In order to support the economy, central banks from around the world lowered interest rates to stimulate economic growth. Lower interest rates make loans cheaper, and people and companies can borrow money cheaper to survive and grow.

Below is a chart of official short term interest rates in the US. At the start of 2020, official interest fell to 0.25%, and in 2022 interest rates have increased significantly.

Now compare the movements in interest rates to the Dow from the chart below:

As interest rates fell, the Dow rose and vice versa. As interest rates fall, companies are able to access cheap loans and make more profits. Also, as interest rates fall, equities become a more attractive investment to earn a return on your money.

What is causing high US interest rates in 2022?

Worldwide and US inflation (rising prices of goods and services) has increased in 2022. To prevent higher inflation, central banks have increased interest rates to protect the economy. Further interest rate rises are expected in 2022, a negative for the Dow. Traders watch economic releases closely to get the latest information on inflation. Changes in inflation expectations cause Dow Jones prices to fluctuate significantly.

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