Long time readers of the blog and subscribers to our research know how much I prefer to keep my charts clean and limit the indicators to a minimum. I’m the opposite of that guy with a ton of moving averages representing every color under the sun. To me, too many moving averages just adds unnecessary noise. Remember moving averages, by definition, are lagging indicators. So to focus on one lagging indicator crossing over an even more lagging indicator makes little sense to me. I prefer to use a 200 period moving average, regardless of the timeframe, more so to help with trend recognition than anything else.
Today I want to point to what’s happening in the Dow Jones Industrial Average. A lot of market participants like to dismiss the Dow because a) it’s only 30 stocks and b) it’s a price-weighted index, meaning that higher priced stocks carry more weight, as opposed to larger market-cap stocks carrying more weight in indexes like the S&P500 or Nasdaq100, for example. For me, I’m old school. I was taught, “Don’t fight Papa Dow”. In addition, I find the fact that there are only 30 components to be an advantage. I can rip through just 30 stocks and quickly get a good feel for how the majority of them look. If there are more good ones than bad ones, it’s hard for the market to go down, and vice versa. It’s harder to get that feel when you have to go through 500 of them, as is the case in the S&P500. Besides, the correlation coefficient between the Dow Industrials and the S&P500 is through the roof. Go back a month, a quarter, a year, 5 years, it doesn’t matter: the correlations are +0.8 and +0.9 across the board. And the further out you go, the closer to 0.99 it gets. So guess what? Price-weighted or not, the Dow and the S&P move together.
More specifically, I want to point out what’s happening with the 200 day simple moving average. Long-time readers know that I despise when prices are near a flat 200 day as it screams lack of trend. Today, prices are below what is becoming a flat 200 day moving average, so at best we are looking at a sideways trend, but in reality with prices trading below it, it’s more likely to be worse than that. Here is a daily bar chart of the Dow with the 200 day moving average in red:
Prices are currently where we were last September. So we’ve essentially gone no where in almost a year. Price pays and that’s the most important thing, but now the 200 day moving average, which as we’ve said we use for trend recognition, is also signaling a lack of trend at best. This is a problem. From an execution perspective, how should we respond going forward? Well, I haven’t been a fan of the U.S. Stock Market Averages anyway as the sideways trends have signaled neutral for a while now. I’m on the Benzinga Morning radio show every Thursday morning reiterating the exact same thing every week. I’ve figured that time was the best remedy, and although that may have been the case, things in my opinion have actually gotten worse over time.
This flattening 200 day moving average suggests being a seller of any strength, particularly if we get back up towards that mean. What can we look for as a sign of strength or further weakness? I think this support level near 17000-17150 that was former resistance in the 2nd half of last year is the big level. We are now testing this for the 3rd time. If that breaks, we are in for more trouble. If prices can hang on to that support and start to recover, putting in a bigger base through time, then I think we can, at some point in the future, consider this a continuation pattern within an ongoing bull market.
Either way, I don’t see anything to do here tactically with the Dow. We’re keeping it in the “Hot Mess” category. We don’t like hot messes, particularly below flat 200 day moving averages. They cause headaches. I have enough of those…..
Also See: A Top/Down Analysis of the S&P500
Click Here to receive weekly updates on the Dow Jones Industrial Average on multiple timeframes as well as all of the other major U.S. Indexes like the S&P500, Russell2000, Nasdaq100, etc.
Tags: $DJIA $DIA $YM_F