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Dow Jones Industrial Average signals possible lower prices for US equities

The Dow Jones Industrial Average and Transportation Index prove useful comparison tools as Dow Theory is a good framework for conducting technical analysis.

Weekly Indices Analysis

The Dow Jones Industrial Average is not making attempts to create new all-time highs. Whereas the Nasdaq is pushing higher for the 6th consecutive week. Today in the Nasdaq, 14300 was traded for the first time and there are no current signs that the momentum to the upside is going to fade, though anytime a big round number is reached, there is a possibility of a correction on profit-taking. Reduced worries over inflation and treasury yield prices are supportive of the moves in Nasdaq. The weakening US dollar is also signaling a return to the longer-term trends.

In a previous report, I wrote about how the Dow Jones Industrial Average and Dow Jones Transportation Index were signalling for lower prices according to Dow Theory. This is now being fuelled with a reduction in fiscal spending, as the stimulus packages run out in the USA. I am expecting this traditional market signal to lead the markets once again and this time I think we go lower assuming nothing changes in monetary policy or fiscal policy. If we were to get an infrastructure bill passed in the next couple of days, this may be enough to get the DJIA moving higher again on fiscal flows. Even though we have good data, and we had a Hawkish FOMC meeting last week, I am not happy about the diminishing amount of current fiscal flows compared to this time last year.

Part of the Dow Theory is that within a primary trend there is room for secondary trends that can last 3 weeks to 3 months. Anything under 3 weeks is considered noise. On the ActivTrader platform, the Dow Jones cash index is showing this week’s price action as finding support from the 20-period exponential moving average after a couple of weeks of the downturn. And we’re still within the 3-month time limit from the all-time high prints. If we get a weekly close soon below the 20-period moving average this will be a very bearish signal for me and a test of the 200 would become my downside target. For now, the weekly chart is doing its best to advertise that it wants to go higher. It will be interesting to see if the momentum can carry this index back higher.

Obviously, the market is not having to be propped up in a worsening pandemic environment, which is a good thing, but the worry is that we haven’t got everything in place to sustain share price appreciation and general economic growth.

Today’s US data was very good with factory growth breaking record highs. The June IHS Markit US Flash Manufacturing appreciated 62.6 from the previous reading of 62.1, but Services data is waning. With softer Services data, the composite reading fell to 63.9 in June from 68.7 in May. This data plus the Federal Reserve Chairman’s testimony yesterday is adding to the problems for positioning, as on one hand, the data is generally good, but the Fed is asking for patience and to be more cautious, even though following on from the FOMC meeting minutes the markets were exuberant of a possible rate hike or two in maybe a couple of years’ time.

Looking around for companies that are doing well or worse in comparison to others in their index, Tesla shines out today as being positive. Tesla is part of the S&P500 and Nasdaq indices and they are both trading in the green currently, even though the FAANG stocks are trading near their daily open or below it. Tesla could be the one keeping the tech-heavy indices higher today and that would explain why the likes of the Dow Jones Industrial Average were not making continued gains, after rallying 600 points in the last couple of days.

Tesla could be about to break out of the recent corrective phase on news that electric vehicle (EV) dominance will arrive 5 years earlier than predicted around 2033. In a report this week consultant Ernst & Young LLP now sees EV sales outpacing fossil fuel-burners in 12 years in Europe, China, and the U.S. -- the world’s largest auto markets. And by 2045, non-EV sales are seen plummeting to less than 1% of the global car market, EY forecast using an AI-powered prediction tool. But it won’t just be Tesla leading the change, it will be all the incumbent carmakers like Ford, General Motors, and Volkswagen.

Apple Inc is the largest constituent part of the Dow Jones Industrial Average, and is a major part of the Nasdaq 100, S&P500, and several more; so, the fact that the AAPL share price today is correcting having taken yesterday’s high print is not useful in determining why the DJIA is failing to rally as much as other benchmark indices but is a possible catalyst for further downside should the AAPL share price fall off a cliff.

If I go with the Dow Theory signal as being an indication of a larger corrective move for the Dow Jones Industrial Average, moving down to the H4 gives me enough data to not get whipped about and some solid signals to follow as price reaches resistance levels and supply zones.

In the above chart, I marked out a box of consolidation in price which was expanded to the upside first and then the downside, before it retraced that expansionary move. Using a Fibonacci extension tool, it all lines up that the first target for bears was hit around the time of the FOMC and now the rally back towards those consolidated prices could be about to turn more drastically lower. The H4 time frame with 20,50 and 200 ema’s is now bearish for the first time since last November, so not a noisy signal at all. Further downside targets would be 31,928 and then 30,000 using the Fibonacci extension tool.