Dow Jones on the brink as 3 key risks push Fear and Greed Index to 31

The Dow Jones Index futures remained on edge on Wednesday as investors watched the new developments in the Middle East, where fighting continued for the fifth day. It dropped by over 100 points, adding to the 400-point losses experienced a day earlier. This retreat could go on further for a while as the blue-chip index has formed a risky chart pattern.

Dow Jones Index falls as risks rise 

American stocks are retreating as investors contend on the rising geopolitical, private credit, and artificial intelligence risks in the market.

A sense of fear is spreading in the market, with the CNN Money Fear and Greed Index moving to the fear zone of 30. Market momentum, put and call options, market volatility, safe haven demand, and junk bond demand have slumped into the extreme fear zone. 

On the other hand, the stock price strength and stock price breadth, which are in the extreme greed zone, have started moving downwards.

There are three main reasons why the Dow Jones Index is in a downward spiral. The most notable one is the ongoing war in the Middle East, which has pushed crude oil prices to $84. 

Iran has warned that oil will jump to $200 a barrel as the war continues. It hopes that such prices will put more pressure on President Donald Trump. In a statement on Tuesday, he said that the US will provide insurance and security to traders passing the Strait of Hormuz, but it is too early to determine whether it will have an impact.

Private credit risks have risen

The Dow Jones Index is also retreating as woes in the private credit industry escalate. Blackstone, the biggest alternative asset investor, experienced huge outflows in its flagship private credit fund. Its investors withdrew 7.9% of the fund.

Private credit investors have been stung recently because of the ongoing woes at Blue Owl, a top company with over $350 billion in assets under management. The company sold its fund for $1.4 billion and restricted its investors from redeeming the remaining funds. 

Private credit stocks are some of the top laggards this year, with Blue Owl falling below its IPO price. Similar companies like KKR, Apollo Global Management, and Ares have plunged as investors worry about the potential for a private credit bubble.

At the same time, market participants are concerned about the AI industry, which some investors believe is in a bubble right now. While the industry growth will continue, investors are worried that it will disrupt some existing companies, especially those in the software, wealth management, and insurance brokerages.

Indeed, companies exposed to the AI industry are some of the top laggards in the Dow Jones Index. They include firms like Salesforce, IBM, Microsoft, and Amazon.

Dow Jones technical analysis 

Dow Jones chart | Source: TradingView 

Technical analysis suggests that the Dow Jones Index will drop further before recovering. It has formed a bearish divergence pattern, which happens when top oscillators like the Percentage Price Oscillator (PPO) and the Relative Strength Index (RSI) are making a series of lower lows and lower highs during a downturn.

On top of this, the index started forming a rising wedge pattern in November last year. The upper side of this pattern connects the highest swings in November, December, January, and February.

On the other side, the lower side linked the lowest levels since that period. This pattern normally leads to a strong bearish breakdown when the two lines converge, which is happening now. Therefore, the Dow Jones could be at risk of further downside in the near term.

The rebound will likely happen when there are signs that the war is about to end.