The Dow Jones Industrial Average (DJI) has plummeted this week as the US economic risks jumped following Donald Trump’s Liberation Day speech. It plunged to a low of $40,545 on Thursday, its lowest level since September 11. It has crashed by 10% from its highest point this year as it moved into a correction.
Fear and greed index has plunged
The Dow Jones crashed as investors panicked and either sold their shares or stayed in the sidelines.
A good example of this is the performance of the fear and greed index has plunged to the extreme fear zone of 8. The last time the index was this low was during the onset of the COVID-19 pandemic.
All sub-indices of this index have moved to the extreme fear zone. The market momentum indicator, which compares the S&P 500 index with the 125-day moving average, has dropped to the extreme fear zone.
Similarly, the stock price strength has crashed as the number of companies trading at their 52-week lows has risen. The stock price breadth, which looks at the McClellan Volume Summation Index has also plummeted. Other gauges like put and call options, market volatility, safe haven demand, and junk bond demand have moved to the extreme zone.
The VIX index, which is widely seen as the fear gauge in Wall Street, has jumped to $30, its highest level since August 2024. It has risen by over 135% from its lowest point in December last year.
Is the rising fear a good catalyst?
A common saying in the stock market recommends buying when everyone is fearful, and selling when everyone is greedy.
This saying has worked relatively well in the past as bull markets typically start when the fear and greed index is in the deep red zone. For example, the Dow Jones and the S&P 500 index started a strong comeback in March 2020 when the fear gauge plummeted.
Numerous catalysts may push the Dow Jones Index higher in the coming months. First, Donald Trump has already unveiled his tariffs against all countries bringing goods to the United States.
The next stage will be negotiations with other countries. He has already hinted that he will be willing to take some “phenomenal’ offers from countries like China. For example, he has said that he may decide to lower tariffs if China agrees to a TikTok deal.
Trump is also under pressure from the business community to offer some exclusions. In a statement, the Business Roundtable said:
“However, universal tariffs ranging from 10-50% run the risk of causing major harm to American manufacturers, workers, families and exporters. Damage to the U.S. economy will increase the longer the tariffs are in place and may be exacerbated by retaliatory measures.”
The Dow Jones index may also rebound as the Federal Reserve intervenes if it believes that the economy was moving to a recession. While US inflation is high, the Fed may decide that a rate cut will be necessary to supercharge economic growth.
Dow Jones Index technical analysis
The daily chart shows that the Dow Jones Index has crashed in the past few months. This crash happened after it formed a double-top chart pattern. It has also moved below the 50-day and 200-day moving averages, meaning that a death cross may happen soon.
The distance between the double top and the neckline is about 7%. Therefore, measuring the same distance from the neckline gives the next Dow Jones target at $38,900, the lowest level since August 7.
Therefore, there is a likelihood that the index will drop to that target and then resume the uptrend.
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