Thursday, 07 April 2016 17:08 Written by

Technical Analysis DJI : 2016-04-07

US stocks have been declining since the start of this week ahead of the corporate earnings season for Q1 in US. The first data will appear on April 11. According to Thomson Reuters consensus forecast, the gross earnings of S&P 500 components will fall by 7.1% compared to the Q1 2015. Moreover, some investment bankers worry the earnings may fall by more than 9%. Let’s consider the Dow Jones industrial average stock index as it embraces industrial companies. The corporate earnings may have additionally suffered from the relatively low producer’s price index and the industrial PMI in oil, metallurgic and other sectors. Will the DJI begin edging lower?

We believe the negative performance of real sector companies may be explained by widening deficit of US trade balance in February by 2.6% to $47.1bn. Adjusted for inflation, the deficit is $63.3bn which is the record high since March 2015. Due to this, several international investment banks revised down the US GDP for Q1 2016 to +0.4% year on year. This is far below the +1.4% increase in Q4 2015. The trading volume of DJI components slumped 20% since January and 10% since early March which may highlight the lower investors’ enthusiasm ahead of the earnings season. This seems logical as DJI added the modest 1.5% since the start of 2016. This week the March Fed meeting minutes will be released late on Wednesday while the next significant US data will come out only on April 13.

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On the daily chart DJI: D1 is struggling for getting back into the rising trend after the recent break down through its support. The MACD gives bearish signal while Parabolic still indicates upward movement. The RSI has left the overbought zone and has formed negative divergence being above 50. The Bollinger bands have widened a lot which means higher volatility. The bearish momentum may develop in case Dow Jones industrial average falls below two last fractal lows and Parabolic signal at 17394. This level may serve the point of entry. The initial risk-limit may be placed above the last fractal high at 17848. Having opened the pending order we shall move the stop to the next fractal high following the Parabolic and Bollinger signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level at 17848 without reaching the order at 17394, we recommend cancelling the position: the market sustains internal changes which were not taken into account.

Position Sell
Sell stop below 17394
Stop loss above 17848



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