Travelling Technicals with Global Indices: Dow Jones Industrial Average

The world's most renowned stock index, the Dow Jones Industrial Average has a rich history of tracking stock performance having been published on the 26th May 1896 by its formulators financial journalist Charles Dow and statistician Edward Jones to study the price movements of industrial companies listed on the New York Stock Exchange that allowed for an additional format of analysis at a time when most analysts used the convention of fundamentals when assessing the degree of fair price of a company's value.

Many would say this heralded in the era of technical analysis as a legitimate form of the study of price movements that point the precise price where equilibrium could be found and then decipher whether the particular stock was overbought or oversold. Although most who use technical analysis do so in the hope of catching short term speculative moves in trading, the liquidity it generates through participants who use it plays a vital part in the stock market process.

The index tracks the 30 largest listed industrial companies listed on the New York Stock Exchange however the swell of companies listing as well as the changing economic dynamics in the US over the past century has slowly eroded the relevance of the index although it still tracks some of the world's biggest companies, a gauge that can be used in the assessment of the strength of global equities.

Listed below are the current constituents that feature in the Dow Jones Industrial Average with the longest listed company being General Electric in 1907 with previous stints before that and the latest inclusion of Apple in 2015.

Changes to the index don't take place regularly as modern indices do on a quarterly or biannual basis leaving it susceptible to becoming stagnant for a lengthy period of time.    

 

Let's have a look at the charts:

Quarterly

Given the index has a long spanning history its fitting to take the opportunity to observe previous rallies and selloffs with the chart shown following the period between 1988 till present.

Looking to the left hand side of the chart we see an impressive rally that began in the early 1990's that offered little resistance in the way of buyers with the outcome leading to a tremendous point accumulation that find a top at the height of the I.T Bubble of the late 1990's. 

This marks the transition from a trending market to an uncertain trading market that's encapsulated by two notable economic events that caught the market on the wrong footing, holding back the ease of flow with which the index sliced through old highs marching its way to the top.   

Immediately noticeable is the area of support just above 7 000 that provided the platform for fresh rallies to take off on a number of occasions. This support was built over a number of years reiterating the observation that the lack of change that happens in the index brings about stagnancy.     

From 2009 the market exhibited another flawless rally having being supported by the Federal Reserve who've used every monetary tool it has to resuscitated the US economy  with the result having gone down as one of the longest bull runs of all time. A rally with such power isn't created from inter yearly swing highs or lows but more so with an element of momentum to it. 

I've placed a 13 SMA and a MACD indicator onto the chart to find the levels of impulse the chart still possesses and whether there might be a chance that we see previous highs being taken out. The moving average still exhibits a degree of trendiness to its shape placing a positive edge in favour of the bulls here. However we do see the MACD histogram trending downwards. 

The price has tested the 13 SMA a number of times and has successfully managed to keep above that line but starting to wane off indicating potential to fall off. 

There's strong support at 16 000 that's been guarded well over the past two years which says it'll be a tough level to beat but in saying that we cannot forget to weigh up the grim prospects that lie ahead making me believe that this index may have reached a top. 

If the levels of 16 000 were to be taken out then we'd see a quick drop down to 14 000 from which we should find decent support in a previous resistance area. 

Weekly

A closer inspection of the sideway movement we saw on the quarterly shows us that the Dow Jones might well indeed be forming what looks to be a triple top formation. We've seen a large dome throughout 2015 that held support at the 16 000 level. We then saw a brief rally upwards only to be met with resistance at 18 000 before dropping off again.

Strange as it may seem, the all time highs have yet to be retested with the index but 18 000 looks to be a round number traders are using to stop and start rallies.

Currently the price sits close to the 18 000 level which does create some anticipation that a break could be imminent however we'd need to see enough momentum produced to push it over this barrier which seemingly doesn't show any evidence on the higher timeframes.

I've drawn a rectangular support box between the levels of 16 000 and 15 500. As mentioned above, upon closer inspection we can now see exactly where vulnerable points could lie with 15 500 the price to beat if we were to see the index come off here.

If that wasn't to happen its safe to assume that we could be headed into a consolidatory range so its important to note the price action that takes place at those levels for indications might very well show a potential buying area back to the top of the resistance of 18 000.