The Dow Jones Index has pulled back in the past few days as the recent bull run faded. It pulled back to a low of $46,350, and a risky pattern it has formed points to more downside in the coming weeks as the earnings season starts.
Dow Jones Index technical analysis points to a crash
The daily timeframe chart shows that the Dow Jones Index has been in a strong uptrend in the past few months, moving from a low of $36,577 in April to a high of $47,035 last week.
Recently, however, the index has pulled back, and moved to the lowest level since September as the government shutdown has continued and some Federal Reserve officials have warned about interest rate cuts in the country.
A closer look at the chart shows that the index has formed some highly bearish chart patterns, even as it remained above the 50-day and 100-day Exponential Moving Averages (EMA).
It has formed the highly bearish rising wedge chart pattern, which comprises two ascending and converging trendlines. These two lines have now moved to their confluence levels, meaning that a strong bearish breakdown may happen soon.
The Dow Jones Index has formed a bearish divergence pattern as the Relative Strength Index (RSI) and the Percentage Price Oscillator (PPO) have pointed downwards. Like the wedge pattern, a divergence is a common bearish reversal pattern in technical analysis.
Therefore, there is a likelihood that the Dow Jones and its ETF, like the DIA will have a bearish breakdown in the coming weeks, potentially to the key support level at $45,587, the 50-day moving average. The bearish outlook will be invalidated if it moves above the all-time high of $47,035.
Earnings season is coming up
One potential catalyst that may lead to a Dow Jones Index pullback is that American companies are considering releasing their third-quarter earnings next week.
The earnings season will kick off on Tuesday when companies like JPMorgan, Wells Fargo, Goldman Sachs, BlackRock, Citigroup, and Johnson & Johnson publishes their results.
Other large American companies like Bank of America, Morgan Stanley, PNC, Schwab, and Interactive Brokers will publish their results.
The most likely scenario is where most of these companies will publish strong financial results, with banks benefiting from their trading operations.
Wall Street analysts expect that the S&P 500 Index will have an earnings growth of about 8%, the ninth consecutive quarter of earnings growth. Still, in the past, weaker-than-expected earnings have triggered a stock market crash.
AI bubble risks remain
The main risk in the upcoming earnings season will not come from traditional stocks like banks and energy. Instead, traders are watching the AI industry that has driven the stock market rally.
Top companies in the AI industry like ASML and Taiwan Semiconductor will publish their financial results next week. Investors pay a close attention to the TSMC earnings because it is the biggest fabricator in the world, serving companies like AMD and Nvidia.
These results come as some popular investors, including Orlando Bravo, have warned about the AI industry and the risk of an AI bubble. Other analysts have warned about the ongoing circular deals in the industry,with OpenAI announcing deals worth over $2 trillion, funds that it does not have.
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