The Dow Jones Industrial Average is on a knife's edge between another rally and a slump, as economic tailwinds in the U.S. go head to head with resurging geopolitical risk.
The index climbed on Friday after the U.S. jobs report showed a steady labor expansion and wage growth in July, paving the way for further gradual tightening by the Fed against the backdrop of a "Goldilocks" economy.
This was enough to offset any downward pressure from re-ignited trade tensions on the large-cap benchmark.
The index closed at the top of a falling flag, bullish in the uptrend since June 28, from 24,000. Should it form a complete candle on top of the flag, despite the ramped-up tariff spat, it may signal that traders are prepared to bid prices higher based solely on the healthy state of the U.S. economy.
The falling flag reveals that demand absorbs any supply driven by profit-taking. The downward slope, after a sharp uptake, demonstrates the supply inundation. The upside breakout proves that demand overcame the momentary spike in supply. The penetration of the flag’s top presumably triggered stop-losses from short traders, who then must contribute to demand to cover their shorts, as well as buy orders from longs.
Notice how the 100 DMA (blue) and 200 DM (red) align The MACD’s longer and shorter MAs flatten and the RSI evened out, in anticipation of the next short-term move, determining the trajectory in the midterm. Also, note that should the upside breakout fail, all the above-stated indicators are poised for a bearish crossing.
Trading Strategies – Long Position Setup
Conservative traders would wait for proof that the primary, long-term uptrend is intact when the late-January peak is overcome with a fresh record high.
Moderate traders may trade the uptrend since the February low, when the July 26, 25,587.24, peak is superseded with a new high, resuming the uptrend, which would be followed with a return move that would successfully test the flag's validity, with at least one long, green candle engulfing a preceding red or small candle of any color.
Aggressive traders may enter a long position on the breakout.