Follow the Leader

The Dow Jones Industrial Average (DJI) has retraced 50% of its 2022  bear move and is currently the most bullish of the three main US stock indices.  The DJI action in the next few trading days could determine the direction of US stocks for the rest of 2022.

No market indicator or system is effective 100% of the time.  Traders/Investors live in a world of probabilities  not certainties.  One of the oldest and probably most used indicators  is the 200 – day moving average (MA) of price.  When price moves above the 200 day – MA it’s a bullish signal.  Price moves below the 200 – day MA are  bearish.   When price moves below the 200 – day MA, then within a relatively short time moves  back above the 200- day MA its generally considered a bullish signal.  However, there can be exceptions.

The daily DJI chart courtesy of Trading View illustrates its movements with the 200 – day MA.

Prior to the most recent move above the line in late October, there have been five instances when the DJI move back above the 200 – day MA.  Measured from high point of the breakout they are as follows; 02/02/22, 02/09/22, 03/29/22, 04/21/22, and 08/16/22.

In each of these upside breakouts it would be understandable to expect strong upside follow through, that’s not what happened.  Also note  the secondary breakouts on 02/09/22 and 04/21/22.  Both of these movements came after a primary breakout followed by a brief move below the 200 – day MA, then another move up. Even more frustrating  to the bulls were that the secondary breakouts on 02/09/22 and 04/21/22 exceeded the highs  of the primary breakouts  on 02/02/22 and 03/29/22.  Sadly, anyone buying these breakouts were  buying  tops.

Generally, relatively quick price movements below the 200 -day MA then reversing higher are considered bullish.  Considering what’s happened with the DJI  movements above the 200 – day MA  in 2022, an argument could be made that moves below the average line then back above it are bearish signals.  If so, what about the recent DJI move above the 200 – day MA?  Is  this another fake out break out?    Two factors  hint that the DJI rally could continue for several weeks.

Note that the daily MACD – Histogram is larger than at anytime during the DJI – 2022 decline. This  large Histogram is  typical of what happens at the beginning of a bull move, sometimes called the kickoff phase.  In this case the kickoff lasted two – weeks and  implies  the rally could continue for several weeks  accompanied by a MACD – Histogram that decreases in size.

The second factor involves the actions of the DJI from 11/02/22 to 11/04/22.  After the FOMC rate decision and comments  the DJI dropped sharply and ended the day at its low.  On 11/03/22 there was follow through downside action.  On 11/04/22 the US monthly Payroll reports were released.  This could have been a catalyst  for a continuation of the move down, it wasn’t.  On 11/04/22 the DJI opened the session above the prior day price range. Later in the session the DJI declined but did not go below, or even come close to the 11/03/22 bottom.  Late in the session the bulls rallied and the DJI closed above its opening level.  The bears had a chance to smash prices below the 11/03/22 bottom and failed.

If within the next few trading days, the DJI can continue to rally, 33,287.38 could be important resistance.

On 02/09/22 the DJI had its highest percentage move above the 200 – day MA which was 2.21% above the line, higher than any of the other breakouts.  The current DJI 200 – day MA is at 32,567.64. Adding 2.21% to the current level targets DJI 33,287.38 and matches  the move up made on 02/09/22.  If within the next few trading days, the DJI can rally above 33,287.38 it could signal several more weeks of upside action.

During  the week of 11/07/22 to 11/11/22 the two important levels  to watch are DJI 31,727.05 and  33,287.38.

A move below the 11/03/22 bottom at 31,727.05 could open the door for a multi-week decline.  A move above 33,287.38 could mean a rally into at  least December 2022.

The evidence from the recent large MACD – Histogram and the DJI movements after the FOMC decision favors the bulls.