Looking at the Dow and its Components

Aug 10, 2008: 6:01 PM CST

It’s time to look at the broader picture of the Dow Jones Index, and then look at its 30 stocks to see which ones are overextended both above and below its 20 day simple moving average.

Dow Jones Daily:

The Dow (and S&P and NASDAQ) has gently broken above three forms of resistance:

The upper channel of an ascending triangle pattern,
The flattening 50 day EMA,
and the 38.2% Fibonacci retracement of the May to July downswing

While this is a significant and important development, it would be nice to see follow-through on Monday, meaning we get a ‘clean’ or ‘definitive’ close above these levels (all of which correspond with the 11,700 price level).

Momentum has been clearly building (positively diverging, in fact) and is now clearly uptrending.

The only ‘caveat’ in this bullish scenario is that volume has declined through this rally (officially classified as a “counterswing Up”).  This is not surprising, given the surge in volume to the downside which possibly market the end of a capitulation move (where many longs surrendered at once).

Odds are quite favorable now that a short-term up-swing is underway, which could take price at least to 11,975 (50 % Fibonacci retracement) or to 12,250 (61.8% Fibonacci retracement) or even as far as the falling 200 day moving average (the highest target) at around 12,400.  We will have to monitor price action continually for signs of developing strength or weakness.

For a little bit of fun – and for potential trading candidates – let’s look at how far each of the 30 Dow Stocks are extended above or below their 20 day moving average:

Retailer Home Depot (HD) is the most overextended Dow stock, which represents recent strength in consumer discretionary.  Financial stock Bank of America (BAC) is not far behind Home Depot, as the most recent rally has taken these two sectors considerably higher, much to the broader market’s delight.

General Motors (GM) is most extended to the downside, thanks to poor earnings and deteroriating forecasts and fundamentals.

This week ahead could be good for the bulls if the price indeed does break out of the recent resistance levels.  Place careful stops if not and always monitor developments day to day – all forecasts are subject to change when new developments mandate.

4 Comments

4 Responses to “Looking at the Dow and its Components”

  1. Richard Says:

    Timely, excellent and much needed research with a great presentation of data.

    Based on lower oil, the Dollar Rally has buoyed up consumer stocks and destroyed the commodity stocks.

    Home Depot is elevated above its 20 day as it is a target consumer stock being both in retail and in homebuilding.

    Intel is a consumer stock as well in the sense that it is tied into consumer electronics.

    Take a look at Intel’s chart, it usually gets excited before a major market turn down; I think it is due to investor over exuberance.

    Bank of America is above its 20 day, as is a leader of the Fannie Mae, Freddie mac, and Financial Rally, and because it along with almost 20 other stocks cannot be shorted in the way it has been lately, by order of the SEC.

    The US Dollar is likely to fall lower on Monday as the USD/JPY has a correction, and also as the EUR/JPY has a correction. This means the stocks at the top of the list will fall lower.

    I am bearish all stocks.

    Any time in the afternoon on Friday would have been good to add some to a short selling position by adding to the 200% inverse DXD as it dropped below 60.

    Notice how the natural resource shares are below their 20, this is due to the EUR/JPY, that is the yen carry trade unwinding.

    I know this is going to seem radical, but I have reached or are reaching ‘Peak Dollar’; I provide some ideas on how to work that investment in the linked article.

  2. MIke Says:

    Richard,

    I do not see a linked article. Could you please link it? Thank you.

  3. SteveW (techinal analyst) Says:

    Hi Corey,

    Excellent analysis as always. In the article I linked to, I took a look at the weekly chart, and it’s fairly contradictory to the daily chart. It seems the bulls and bears are in a bit of a dog fight, and the market needs some kind of new catalyst to drive it in a distinct direction. I’d be curious to see what you think of the weekly chart I included in my article vs. the daily chart you posted here.

    -Steve

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