Dow plunges 1,300+ points on grim Fed outlook! Another 10,000 to go?

One day after the US Federal Reserve warned of a long economic recovery from the impact of Covid-19, the Dow plunged more than 1,300+ points - its worst day since March. The gloomy outlook from the Fed comes even after the central bank has pumped nearly $3 trillion into the financial market since February - and continues to pledge even more to battle the coronavirus recession.

The question on everyone's mind is whether this 1,300+ point drop will turn into a near-10,000 point drop back to the low of March which is also the low of the year. Read on to learn more!

The $3 trillion Covid-19 cure?

In the latest Federal Open Market Committee (FOMC) press conference on 10 June, US Fed Chairman Jerome Powell painted a very gloomy picture for financial markets. The central bank has forecasted that the US economy will shrink by 6.5% this year while also announcing they will keep interest rates close to zero well into 2022.

The Fed cut interest rates to zero in March when the impact of Covid-19 landed on American shores. Since then, they have pumped nearly $3 trillion into the financial markets by increasing its bond holdings with $80 billion a month targeting Treasury purchases and $40 billion a month of mortgage-backed securities.

Even with this stimulus, the unemployment rate is at its highest since the 1940s and the bank has warned that it is a very long road to recovery. This is why the Fed also pledged to continue its stimulus plan for as long as it takes. Up until this announcement global stock markets were surging higher.

• The Nasdaq 100 stock market index climbed to a record high just before the FOMC press conference as investors piled into coronavirus-proof shares such as Amazon and Apple which also hit all-time highs.
• The S&P 500 stock market index turned positive for 2020 early in the week of the FOMC press conference, recouping its losses from the coronavirus-led sell-off earlier in the year and is now up more than 45% from its March low.

The Dow Jones 30 index has also been rising higher. However, global stock markets plunged just one day after the FOMC press conference with most indices down nearly 5% in just one day. Many traders are now eyeing a retest of the March lows which will represent significant downside, akin to a market crash! Let's take a look at the technicals.

How to trade the Dow Jones 30 index

Below is the long-term, monthly price chart of the Dow Jones 30 index (DJI30):

Source: Admiral Markets MetaTrader 4, DJI30, Monthly - Data range: from 1 January 2001 to 11 June 2020, accessed on 11 June 2020 at 1:30 pm BST. Please note: Past performance is not a reliable indicator of future results.

With Admiral Markets UK Ltd you can trade Contracts for Difference (CFDs) in stock indices and other asset classes. This product allows you to go long and short a market. You can learn more about the advantages and risks in the 'What is CFD Trading?' article.

The long-term uptrend from 2008 to 2020 is clear to see. Since the beginning of 2020, however, the increase in volatility is also evident and has now threatened the continuation of the market continuing higher at these levels. The volatility on the monthly chart is so high that traders may find it more useful to analyse and trade from a lower timeframe such as the daily chart, which is shown below:

Source: Admiral Markets MetaTrader 4, DJI30, Daily - Data range: from 21 May 2019 to 11 June 2020, accessed on 11 June 2020 at 2:30 pm BST. Please note: Past performance is not a reliable indicator of future results.

In the daily chart above of the Dow Jones 30 stock market index, the vertical red line highlights the beginning of 2020. It's clear to see the coronavirus-led market crash with an impressive recovery from the March lows. However, the market sell-off that started after the FOMC press conference has been very sharp. This is a significant change from the small pullbacks which developed as the market moved higher in its recovery. It is also a huge warning sign that something is different.

Interestingly, the market did not stop at a random price level. Technical analysts will point out the horizontal resistance line at 27,400 as shown by the horizontal black line on the chart below:

Source: Admiral Markets MetaTrader 4, DJI30, Daily - Data range: from 21 May 2019 to 11 June 2020, accessed on 11 June 2020 at 2:45 pm BST. Please note: Past performance is not a reliable indicator of future results.

While this may point to the beginning of a reversal, traders will be looking for confirmations such as lower low and lower high cycle formations. This type of cycle formation helps to show that any buyers trying to push the market higher are failing, thereby confirming how strong sellers are.

There are significant levels of support the market could fall to before attempting a push higher. However, in the long-term many traders point to the fact there is nothing more central banks can do at this point in time. If lockdown restrictions take time to lift and if fears of a second wave of a coronavirus grip the market, some traders are calling for a retest of the March low. For the Dow Jones 30 stock market index, that will be a near 10,000 point drop from bounce off the 27,400 level.

These are certainly interesting, unique and unprecedented times. How will you be trading it?

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