Technical Tuesday: Good Signs For An Old Fashioned DJIA

by: ETF Global

Investors may scoff at it, but they should never ignore the way the media hypes the Dow Jones Industrial Average.

Its wildly different makeup from other indexes can offer powerful insights to market watchers.

Does the strong push back to 25k mean bigger things are in store for the market?

Image result for old man dow jones

(Pic sourced here and a decent movie I might add...)

Another strong week for equities has the major indices knocking on the door of several key levels, none more so than the most widely watched and yet least tracked of them all, the Dow Jones Industrial Average. What do we mean by least tracked? There are currently just six ETFs that are officially benchmarked to the DJIA and five of them are either inverse or levered products, leaving just one, the SPDR Dow Jones Industrial Average ETF (DIA), offering full index replication. And with just $21B in AUM compared to $257B for the SPDR S&P 500 Trust ETF (SPY) or $61B for the Invesco QQQ ETF (QQQ), it’s clear that professional investors have little interest in the granddaddy of all market indices.

So why focus in on the old DJIA? Partly because EVERYONE talks about it, and with it quickly closing on the emotionally significant 25k level, you’ll be hearing a lot more about it soon! The DJIA may be only a lightly tracked index, but thanks to its well-known history and easy-to-understand make-up, it still has a strong hold on the American psyche which means that it won’t be just the financial media playing up a return to old levels. You know they’ll be breaking out those Dow 25k hats everywhere from those local stations at the bottom of the media pyramid right to the top.

Another reason to check in on the good old Industrial Average is for the fact that it can offer a very different viewpoint on the recent equity run-up thanks to its very unique construction. Unlike most modern indices which contain all domestic stocks of a certain size and liquidity, the DJIA is still a hand-curated index of just thirty names and weighted by price rather than by market capitalization. That means the component with the highest share price gets to be the top dog and creates several serious differences between it and say the S&P 500, but the most important being that it has a very different make-up. Technology stocks might dominate the S&P, but they play a much smaller role in the DJIA, making up just 13% of the portfolio to over 21% for the S&P 500 with different holdings. The DJIA weighting to Apple (AAPL) is higher than the S&P’s, but hard-luck IBM (NYSE:IBM) has an allocation more than 7x higher than what it has in the broader index thanks to its higher share price.

Why that is significant is that it means we can look to the DJIA as a confirmation signal of a broader trend, that the recent equity rally is more than a relief rally. IBM isn’t the only one benefiting from a higher share price; Boeing (BA) is the single largest holding along with retailers, financial titans, even fast food chains which give the DJIA a distinctly value flavor while it retains its large core designation. By contrast, both the S&P 500 and the even broader Russell 1000 have distinct growth leanings, making the need for a third confirmation index even more vital.

So what is that outlook? As we’ve already said, the DJIA was up over 2.9% last week, a gain of over 700 points that has it close to that 25k level, although an observant reader would note that even that strong gain leaves it within the downtrend channel that began forming last fall. But that’s not the only interesting thing going on. First and most importantly is the price with the DIA closing at 247.05 for the week, just below its 40-week moving average of 247.42. This is important to note because that 40-week moving average has served as strong support in the past, most notably off the 2016 lows and up until it was pierced by DIA in October of 2018. If DIA can close above its 40-week moving average in the near future, that would be very positive and we would look to see that moving average act as support once again.

Next, we look at the top indicator on the chart, which is the Relative Strength Index (RSI) of the price of DIA. As we can see, the RSI has stayed below 50, indicative of weakness, since November of 2018. This past week we see that the RSI closed just above 50 at 51.02, another positive which we want to see maintained. Finally, we’ll look at the MACD on the bottom of the chart. What we would like to see occur here would be for the MACD signal lines to cross over positively from this oversold level, which could be indicating that the momentum for DIA has changed from negative to positive.

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Let’s finish our analysis by doing a deeper dive into a daily chart. Price action for DIA has been very strong since bottoming in December of last year; however, there are a couple of important hurdles that we still want to see cleared. We can see that DIA closed just shy of its 50-day moving average of 247.47 and just below the 61.8% Fibonacci retracement of its 4Q correction. Clearing these two levels would be very positive for DIA. The last hurdle on the daily chart of DIA is the down trend line from its peak in early October. Should this last hurdle be cleared, we should see continued positive price action and a challenge of DIA’s October price high of 267.56.

Even more interesting than the price action was what was behind it, yes, a good week for Boeing but also for other top holdings like UnitedHealth Group (UNH) and Goldman Sachs (GS). And with more components reporting this week, including Johnson & Johnson (JNJ), IBM and Travelers (TRV), we could be on the cusp of a major turning point for the DJIA in no time!

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.