Dow Jones Industrial Average (DJI)

Dow Jones Industrial Average Aimed At Long-Term Resistance

Posted in Dow Jones Industrial Average (DJI) on March 3rd, 2014 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

With overbought condition stubbornly present on monthly bar charts, the Dow Jones Industrial Average appears to be aimed for a retest of long-term uptrend resistance that currently sits at 16,660. The real question is: Can a breakout in the DJIA occur anytime soon?

The last time this trend line resistance was challenged was on the final day of trading last year (2013) then at the 16,588 level. While it is impressive that equity prices have largely recovered their losses suffered during January, a breakout to the upside might nevertheless be difficult to do at this time.

Widespread expectations of a steeper yield curve (resulting from the taper and a nascent rise in commercial loan activity) however, could mute the thought of a continuation to the multiple expansion that began last year. Moreover, tempered earnings guidance from a number of CEOs this quarter have also dimmed growth expectations for at least the first half of 2014. Adding to this downbeat outlook is, of course, weather related problems that have resulted from unusual winter extremes.

Rapidly rising tensions in Ukraine combined with slowly rising tensions in the South China Sea could also take on more prominence if saber rattling events were to escalate. Such a prospect could tilt investor confidence to the downside and diminish trading activity. As a result, equity prices could suffer with bond yields moving lower in a run-to-safety maneuver. Gold and energy prices could move markedly higher, particularly if natural gas supplies were to be interrupted to Ukraine or to European destinations as a byproduct of Russian political tactics.

In any event, a test of the 16,600 level on the DJIA might present an opportunity to hedge the likelihood of event-risk issues at this time.


Dow Jones Industrials Need To Breakout And Confirm The Transports

Posted in Dow Jones Industrial Average (DJI) on January 23rd, 2014 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

Now that the Dow Jones Transportation Average has broken above key resistance to new all-time highs, it is important that the Dow Jones Industrial Average stages a similar breakout to confirm the bullish trend. This confirmation relationship is a key principle of Dow Theory.  A break above 16,588.30, or preferably above long-term trend line resistance at 16,610 would do just that.

If it turns out, however, that the Industrials do not breakout and confirm the path of the Transports, the resulting divergence could trigger the much-anticipated correction that many investors have been expecting or even hoping for.

Nevertheless, many signs continue to show that the economy is in good shape and is growing at a slow, but steady pace in the 2%-to-3% range. Fewer layoff plans by businesses and a general decline in weekly jobless claims add to optimism that 2014 could prove to be another good year.

With earnings season at hand however, there have been a number of corporate earnings reports that have thus been considered to be lackluster. One common theme seems to be the absence of top line revenue gains with stepped up cost-cutting efforts instead underscoring the current profit picture. In light of this and the tapering plans of the Federal Reserve, any hint of a stall in economic growth could result in a period of increased volatility.

The Fed has maintained that policy decisions going forward will be data-driven. As a result, this earnings season could hold a good deal of sway with investors, the averages and the Federal Open Market Committee. Interestingly, a period of increased volatility, if it were to emerge, might send investors back into the fixed income markets and blunt the recent rise in interest rates. Such an outcome would likely be a plus for the housing market and for housing stocks.

At the moment, inflation is low, U.S. dependency on imported oil is diminishing and the employment picture is improving. Couple this set of circumstances with the fact that many investors remain under-exposed to the equity markets and a positive long-term outlook begins to emerge. Thus, any near-term setback in equity prices, even if it is sharp, might present an interesting buying opportunity.