After breaking out from the red downtrend and surpassing the 34500 resistance, the Dow enjoyed a robust rally. Since July 10, the Dow has experienced only three red days until today. However, recent days have shown a deceleration in momentum. Following the significant surge, a correction may be looming, possibly triggered by recent developments at Fitch.
Fitch recently downgraded the US credit rating from AAA to AA+. According to Fitch’s statement, fiscal deterioration is anticipated over the next three years due to an increasing debt burden. The US debt-to-GDP ratio has risen to higher levels following the COVID-19 stimulus and has remained elevated ever since.
Since the beginning of 2022, whenever more than 85% of Dow Jones members are priced above their 50-day moving average, a correction or a period of several months of flat consolidation has typically ensued. At the end of July, this statistic once again exceeded 85%, signaling a cautionary note for bullish sentiment towards the index.
Despite the presence of negative news and indicators, the uptrend remains firmly intact. The 8-day moving average could serve as a trigger for a short-term correction. However, any downward movements should be viewed as buying opportunities, as long as the uptrend and the 34500 support level are maintained. In the event of declines, potential targets or supports could be identified at 35200 and 34900.
For those adopting a bullish stance, short-term targets might be considered around 35800, while medium-term targets could aim for 36500. It is worth noting that a potential surge in the Dow/Nasdaq ratio could be on the horizon in the coming months. This is supported by the formation of a falling wedge pattern in the ratio, coinciding with indications from PMI and ISM manufacturing data showing a potential dip. For more comprehensive insights, please refer to our monthly outlook.
