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Bullish Dow poised to break through 28,000 level

AS we enter the second quarter of 2019, we cannot help but look back at the fourth quarter of 2018 when the Dow Jones Industrial Average plunged 600 points - a black spot in US market history.

Last December proved to be a Christmas nightmare for investors as the Dow experienced the worst single monthly fall on record. Festive spirits evaporated as investors worried about a looming recession in 2019. It has been 10 years since the collapse of Lehman Brothers, sparking the Global Financial Crisis. The Dow's plunge encouraged talk about the end of a 10-year expansionary cycle.

The main contributing factors were the Sino-US trade war, untimely interest rate hikes by the US Federal Reserve, Brexit, and the end of the European Central Bank's quantitative easing programme. These events caused the Dow to nosedive. However, much of investors' worries proved unfounded as the Dow staged a strong recovery at the start of the 2019 due to optimism from the resumption of trade talks between the Americans and Chinese.

The Dow experienced a slight bearish correction after the 10-year - 3-month yield curve inverted on March 22, 2019, but it recovered merely a week later on March 29. From a technical perspective, the monthly candlestick for March did not even fall to the previous month's low. As the candlestick closed for the month of March, it formed a hammer and stayed within the range of the February candlestick, signifying a bullish breakout.

The bullish momentum for the Dow has been present since 2013. After its recovery in 2009, the Dow broke the resistance of the 2006 high at 14,198.10 in April 2013. The Dow continues to grow stronger despite the taper tantrum in October 2013 and the Fed's subsequent interest rate hikes.

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Despite minor bearish corrections in the first and fourth quarters of 2018, the Dow had a great start this year. Our technical indicators point to a bullish Dow staging another rally beyond 28,000 and subsequently, the grand resistance level of 30,000.

There are several reasons for our bullish view on the Dow. The first is that the December 2018 candlestick rejected the 23.8 per cent of the Fibonacci level and the demand zone. In addition, the Bull closed above the secondary uptrend line. These would result in a subsequent bullish run for the Dow in the long term.

The second factor is the formation of an ascending triangle, which is a sign that the market is consolidating its strength in an attempt to break out.

Last but not least, there is a "golden" cross formed from the 50-day simple moving average (SMA) and Bollinger band. The idea is that if the lower Bollinger band crosses above the 50-SMA, it is a signal for a sustained rally for the Dow.

  • The writer is research analyst at PhillipCapital.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

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