Dow holds back ahead of tapering

Price at time of writing - 16020.

Although a determined pull-back on the Dow was expected upon completion of my upside target at 16,175, the urgency of the fall early last week was still quite unnerving.

With the quantitative easing (QE) taper surely approaching, and as ten-year US Treasury yields increase further to 2.86%, we should prepare to see an increase in volatility across all global equity markets.  Stay short on the Dow Jones and US ten-year Treasuries.

As we rightly appreciate the many boats floated as a result of the US Federal Reserve's experimental monetary policy, we should not get overly negative about the imminent tapering of its highly successful QE operation. This should certainly not be viewed as an interest rate increase (this remains a long way off), but merely as a means to drain the financial system of excess liquidity. As the market transitions to a less accommodative policy, this too will throw up other opportunities along the way. 

In a sign of transition to a slower pace of incline, the Dow has broken below both the short- and medium-term rising time-angles, highlighted on the chart in red and blue respectively. We also sit just below the bottom of the broader resistance band defined as 16,023-16,186. Although the market could well test 16,175 again, evidence shows that this band will prove a tough nut to crack.  Nevertheless, should the Dow prove me wrong and immediately break above 16,186 I will be working to determine in advance where the next upside resistance band lies. 

Recommendation: Stay short. Initial target 14,827. Stop-losses can be activated on strength above 16,250.

Dow Jones chart

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.