Dow Forecast: DJIA hits record as energy, financials extend breakout

Dow Forecast Update: The Dow has reached its 4th record high in as many days, on a day when the Nasdaq was plunging. Sector rotation is the name of the game. This has helped to lift non-tech stocks as tighter US chip sales restrictions to China triggered a sell-off in shares such as Nvidia (-6%), AMD (-8%), Microsoft (-2%) and others in the so-called magnificent 7 group. The Dow has also been boosted by a big rebound in oil prices, lifting energy names.

Why is the Dow rallying despite tech selloff?

The Dow, and the small-cap Russell 200 have both enjoyed a big rally in the last several days, presumably because of the inflation report released last week which showed consumer prices falling to 3.0% y/y in June, which was better than expected. Small caps, energy and financials have all benefited while technology stocks have fallen amid rotation into value from growth.

So, despite the tech slump, sentiment remains positive towards US stocks amid confidence that the Federal Reserve will cut rates. It is just that the tech sector is no longer looking valuable at these still-high levels for many. As we have seen repeatedly in the past, correction like the one we have seen this week in the tech sector have been bought fairly quickly. Don’t be surprised if we witness another dip-buying into the sector once profit-taking pressure subsides.

Dow Forecast: XLE and XLF extend rally

Supporting the big breakout in the Dow, we have seen two major sectors rally sharply in the last few days.

As per the chart of the Financial Select Sector SPDR Fund (XLF), we have seen a breakout in the sector after a multi-month consolidation ended last Friday. The XLF broke out and hasn’t looked back since:

Similarly, the chart of the Energy Select Sector SPDR Fund (XLE) has broken out of its own continuation pattern to the upside – this one being a bull flag:

Dow Forecast: Technical analysis

Given this week’s bullish breakout, the path of least resistance on the Dow Jones remains to the upside. Now that it has broken above key resistance and a psychological hurdle of 40,000, this area is going to be the most important support on any future dips. Below that area, the 39450-39680 zone would be the next key area to watch. On the upside, the next Fibonacci-based extension level comes in at 41,366, marking the 161.8% extension of the last significant move down from the May high.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.