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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