Dow Jones index rally is a bull trap

The Dow Jones index (DJIA) is in for a rough ride in March as American stocks brace for more headwinds going forward. This is according to Mike Wilson, one of the most respected analyst in Wall Street. As such, the Dow could continue the recent sell-off, which has seen it crash by more than 5% from its highest point this year.

Dow Jones faces significant headwinds

In a statement, Mike Wilson warned that American stocks are in for a difficult period in the coming months. This was a notable statement considering that Wilson was voted as the number 1 analyst in Wall Street in 2022. He said:

“Given our view that the earnings recession is far from over, we think March is a high-risk month for the next leg lower in stocks. We think this rally is a bull trap but recognize if these levels can hold, the equity market may have one last stand before we fully price the earnings downside.”

The Dow Jones started the year well as investors penciled in a potential Fed pivot this year. However, recent data and statements have signaled that this pivot is not coming any time soon. Data published on Friday showed that inflation remained at an elevated level in January. 

Several Fed officials have warned about the need to stick the course on fighting inflation. In an interview last week, Loretta Mester warned that the Fed needed to continue with its rate hikes until there is enough evidence that inflation was cooling.

And in a separate interview, which I wrote about here, Larry Summers is increasingly concerned that the Fed will not reach its 2% inflation target. Summers’s statement is notable because he was one of the first economists who predicted inflation in the US. 

Earnings growth slowdown

Meanwhile, analysts are cautioning against earnings growth in the US. Data compiled by FactSet shows that earnings have dropped by -4.8% in the fourth quarter. That is the worst slowdown since Q3 of 2020. At the same time, the estimated earnings decline was 3.3%, meaning that stocks are doing worse.

Many well-known companies have announced weak financial results. Some of the most notable ones were Goldman Sachs, Citigroup, and Walmart. Looking ahead, the Dow Jones index will react to the upcoming consumer confidence data and key earnings from companies like Workday, Occidental, and Zoom Video.

Dow Jones technical analysis

DJIA chart by TradingView

Turning to the daily chart, we see that the Dow Jones index formed a triple-top pattern around the resistance point at $34,000. In price action analysis, this pattern is usually a bearish sign. It is now sitting close to the neckline of this pattern at $32,574. It has also moved below the 23.6% Fibonacci Retracement level.

The index has also crossed the 50-day and 200-day moving average, meaning that it is at risk of forming a death cross pattern. Therefore, the outlook remains bearish, especially when it moves below the key support at $32,574.