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Dow Jones (DJIA) 12,720

It has been pointed out that the Dow, rather than finding new year support, has actually made the worst start to a year since 1904. The index has suffered a lot in the past three weeks, but a recent speech by the Fed’s chairman, Ben Bernanke, made it pretty clear that an interest rate cut will come at the next Fed meeting at the end of the month. This could be by as much as 50-basis points, and the Dow is likely to react well to this news. While this information has already been absorbed by the market, partially at least, and the Dow is likely to remain vulnerable to other bad surprises, traders are watching closely a key support level. If the 12,800 barrier is broken the existing downtrend could reverse and the index could start moving back up. With the likeliness of rate cuts, both in US and UK, we think it’s worth buying the index at the current levels. However, place a stop loss at 12,000, below which the downward trend could be reinforced.

ACTION: BUY Dow Jones • Target 13,400 • Stop Loss 12,000

TIME TARGET: 4 WEEKS