Dow Industrials give relief rally more oomph

The index’s health has improved… just in time for more tough tests

Dow Industrials are joining the global stock market rally partly on relief that monthly U.S. payrolls turned out to be lacklustre rather than dire. Also on rising expectations that the Fed will soon step in again to lower borrowing costs. With the concept of a manufacturing recession haunting markets this week after the ISM’s closely followed factory gauge posted a decade low last month, DJIA is also in focus given a preponderance of huge producers of consumer and capital goods among its constituents. It helps explain why the Dow has more than halved a 3-session loss of over 1,000, standing some 400 points lower for the week into the final couple of hours of Friday’s session.

Among those makers, Apple is pulling away as the markets biggest riser of the year, whilst bolstering the index’s gains with a 0.7% rise this week on the back of reports that it’s increasing production of new iPhones. Top-performer Johnson & Johnson is set for a 2.7% weekly rise after settling a lawsuit in Ohio.

At the very least U.S. stock markets, including the Dow, are getting a chance to dust themselves down from a bruising week before bracing for further crucial risk events looming in the days and weeks ahead. For the year, although DJIA has been tardy at times to match new tops posted by other principal U.S. indices, it continues to track their trends. Dow has risen 6.5% off Wall Street’s bottom at the end of May, an amount that’s almost identical to the much broader S&P 500 index’s gain over the same stretch. Tentatively, this suggests that drags that had been anchoring the DJIA relative to peers might be starting to fade.

On the one hand, the number of Dow stocks falling clearly below the ‘zero price return’ line for the year is higher in the second half of the year, as shown below. On the other hand, the losers are almost all in the lower percentiles of the price weighted Dow, except for United Health, DJIA’s 5^th ‘heaviest’ share. It’s a fundamental set up that equips this market to keep participating in the broader U.S. index trend into the end of the year, so long as key details like those outlined above don’t change much, which of course they can in coming months.

Rebased: Dow Jones Industrial Average shares down in 2019 – year to date [04/10/2019 19:41:56]

Source: Bloomberg/City Index

Chart thoughts

The Dow’s coil within a tightening rising wedge has been in place all year. In effect, this wedge comprises of either the long-term rising line established well over three years ago, or the one that began early this year. The latter has been tagged most cleanly by lows in recent weeks for further validation. Overall, it looks like a bullish structure in as much as it stabilises gains and losses within a range. However, as it narrows, the risk of a volatile breakout increases towards the apex. At the same time, the upper line of the wedge is highly significant as its inception was the 3^rd October 2018 peak that presaged that winter’s dramatic correction. Having broken that high this year in July, it’s worth noting that DJIA was rejected there again on a fresh approach in September. Dow’s Friday rally in that context may only be bullish to that resistance, particularly following the ominous looking long-bodied candles earlier this week. Bears would likely pounce aggressively on the next failure in this region within the wedge. A sustained break above the structure would be an opening for smoother upside.

Dow Jones E-Mini Future (continuous) – Daily [04/10/2019 20:18:33]

Source: Bloomberg/City Index