Eight-day trade tensions sends Dow near key levels – how to play it smart

Eight days of decline for the Dow Jones Industrial Average plunged the index to just 1% of its 200-SMA level, which turned out to be a turning point in April and May. Losses, according to many, are due to the fact that trade concerns around the US have a more negative effect on stocks than most would have admitted. As investors flee TNCs (Trans-national companies), Dow is now 1% in negative territory for the year, while the Russell 2000 – composed of companies that derive their revenues mainly within the borders of the United States – has a 10% profit . This phenomenon puts the indices on track to record their biggest divergence in the results for any calendar year for the past 2 decades.

Dow's Misery

The question here is, weather these critical levels will bring hope to investors. The price broke successfully its 50-SMA on daily chart, as now it is on key support levels. A breakaway here will send the index tumbling below its 200-SMA, deep in correction territory.

However, investors’ technical tools vast way beyond just the SMAs.

At this level lies a horizontal support from the local minimum, as well as 50% Fibo of the short-term rising movement. DeMarker is also in over-sold levels, levels, that in the past 3 times saw the index regain its ground and wipe out almost all of its losses. If the price rebounds from here, there will even be a false breakaway of the diagonal trend line.

For long positions, we wait the price to go below the 200 SMA. As it can be seen from the previous times, the price cannot break that level on the first go. So I expect a breakaway in the intraday session, after which the price will come back above the SMA, leaving behind a big spike (as in previous attempts). Then we can look for a price action signal and we will see how DeMarker reacts to the battle between bulls/bears. After the price action signal we can go long with SL below the spike around 24,104. The first resistance comes around 24,966 – where we will have 1:3 risk/reward ratio. In the case of a successful break and test of the level, we could add to the position or move the stop to the zero level on the original one. The second resistance comes at 25,400, where we will have risk/reward ratio of 1:5

Charts: Used with permission of Bloomberg Finance L.P.

 Trader Aleksandar Kumanov

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