Today, the Dow Jones is trading lower and is at risk of trading much lower in the next few days as a head and shoulders pattern has been forming over the last few weeks.
The momentum in Dow Jones has been positive ever since the Federal Reserve increased its balance sheet from October 2019. However, in the last few weeks, the balance sheet has remained somewhat unchanged and the Dow Jones has struggled to trade higher.
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The stock market also stopped in their tracks as the spread of the Coronavirus increased. The growth rate for confirmed coronavirus cases has slowed slightly, with the growth of the last day being 26.9% vs. the average growth rate since January 20 which is at 38.2%. However, if the growth rate of 26.9% extends for the next 14 days, there will be 276,406 people with the virus. Thus it is understandable that stock market traders are stressed. In the last few days, the virus has also spread to more countries and there are 118 cases confirmed outside of China.
The mood of the markets has changed from early January, and we can see the results in the chart below. The Dow Jones has created a large head and shoulders pattern. The pattern is bearish, and it suggests that on a break to the “neckline,” currently at 28,486, the Dow Jones might slide to the 27482 level.
The pattern is formed by a left and right “shoulder,” and the “head.” Those points in the chart below are the January 2, 17, and 29 highs. If we connect a trend line via the January 8 and 30 lows, we can derive the “neckline” of the pattern, a break to this line will trigger the pattern, however, I prefer combining the trendline break with the break of a horizontal level. I am therefore waiting for a break to the December 31 low of 28373, to let me know that the trend in the Dow Jones indeed has turned lower.