State of Dow Jones - Calendar Week 41 2021

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State of Dow Jones - Calendar Week 41 2021 Welcome to the second episode of the blog post series "State of Dow Jones", where we look at the leading US stock index from different perspectives and try to determine how solid the current development is. Technical Chart for Dow Jones Every "State of Dow Jones" blog post should start with the technical chart, so here we go (created on tradingview.com): The Dow Jones overcame the old falling highs and the important resistance at 25 000, now trading at 35 294 points. The index is trading above its SMA 20 again and even went into the upper Envelope band. This means the Dow is slightly overheated and it is likely that the index will show a small pull-back before rising again. The RSI is at 60, three trendlines were identified and crossed during the last trading days. The technical chart provides us with enough confidence to say that the correction might be over and the outlook is neutral, or maybe even slightly bullish. Marke

Dow Jones sprinting back to neutral zone

Dow Jones sprinting back to neutral zone

Not there yet: After after a quick test of an old high from April (!), the Dow Jones aims to return to a neutral zone. Let's look at both the technical and the market breadth aspects.

Technical perspective on Dow Jones


Technical chart for Dow Jones created on tradingview.com
 
The Dow Jones fell through the lower Envelope bands and touched the old all-time high from April at ~ 33 623. Technically, the Dow Jones was in a short-term oversold zone for three trading days.
 
While the dip from 16th July ended at the rising trendline and was a healthy "higher low", this time the dip left the existing uptrend and also marked a "lower low" compared to the last dip (bearish on short-term). However, this was still an "higher low" compared to the dip we've seen on June the 18th (bullish on middle-term).
 
The price tried to return to it's SMA 20 but failed at breaking through the barrier at ~ 34 850 / 34 900. Also, the price was not able to return to the previous uptrend (blue trendlines in the chart above). Technically, the Dow Jones still needs to prove that the consolidation is over by establishing itself above a level of 34 900, even better above 35 150.

Market breadth perspective on Dow Jones

 

The Advance Decline Line for Dow Jones is a mirror of the index itself, confirming the current price development.
 
The Advanced vs. Declined data for Dow Jones underlines the strong recovery from the dip.

The McClellan Oscillator for Dow Jones seems to have found a bottom and has been rising for two days in a row. While this indicator still is bearish because it has a negative value, swing-traders might have seen the anti-cyclical signal here (bottom was formed, indicator is rising). 

The McClellan Summation Index stopped declining and might form a bottom.

In terms of market breadth, we observe a bearish phase with hope for a reversal.

New: Market Breadth Dashboard now also includes the RSI (TradingView version)

As you can see on the market breadth chart for Dow Jones, we started to include tradingview.com's implenetation of the RSI indicator. This is the second non-breadth indicator on the market breadth dashboard, but similar to the Envelopes, this indicator helps to determine the state of the index.
 
So, how does this additional indicator bring additional value to the dashboard?
Well, the Envelopes were introduced so they show the "usual corridor" for prive development. They help to visualize the expected price ranges and also provide overbought/oversold visualization based on the price's distance to the SMA 20.

So while the main purpose of the Envelopes is to provide a "corridor" for expected movements, the RSI can not do such thing. The strength of the RSI is to provide a clear overbought/oversold signal based on average gains and losses of the past 14 trading days ("relative strength").

But why introduce an indicator for providing overbought/oversold signals when we already have one?
Well, you've got a good point here. Truth is, that the RSI can be used to confirm such signals which were given by another indicator, and the RSI helps to determine where the index or security is currently standing compared to a period in the past.

Applied to the Dow Jones and as seen on the chart above, the RSI touched the green line at 30, thus not providing an oversold signal if you only look at the hard numbers. But, when comparing the current indicator value to the past, it is clear that the Dow Jones has hit a phase of weakness and also two other things can be observed:
  • The RSI bounced from the -30 line
  • The RSI advanced back to the 50 line and therefore had a "breakout" above previous levels when the indicator danced around the level of 40

Possible signals for a long trade?

Given that, the RSI provides a confirmation to our expectation that we've seen the bottom of the mini "sell-off". Market breadth might show a bottom, RSI shows a bottom... so, are we good yet or should we wait for another signal before entering a long trade?

 

  • When you're only looking at market breadth and have a short-term scope, you can see that the McClellan Oscillator formed a bottom and rised -> signal is already there
  • When you're only looking at market breadth and have a middle-term scope, you should wait until the McClellan Summation Index rises again
  • When you're looking at market breadth and technical data, try to look at the following conditions:
    • The McClellan Oscillator formed a bottom and rised -> fullfilled
    • The Dow Jones should trade above the SMA 20 again and/or return to levels above 34 900 -> not there yet
    • The RSI should be above the 50 line again -> not there yet

 

Please don't consider this as a trading advice.












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