Index in focus: Was that a fakeout breakout on the DJIA (US30)?

Matt Weller
By :  ,  Head of Market Research

Index in focus: Was that a fakeout breakout on the DJIA (US30)?

If you’ve been thinking that this year has been a bit too easy for US stock market bulls, you’re definitely onto something.

Astoundingly, the Dow Jones Industrial Average (DJIA, US30) has gone nearly ten months without even a pedestrian 5% pullback! To put this statistic into context, the Dow has historically seen at least a -5% correction every 71 trading days, or roughly every 3.5 months, so on average, we would have expected three such pullbacks since the start of November instead of zero.

So, when the index broke out to fresh record highs above 35,100 earlier this month, index traders thought that we were in for more of the same steady grind higher in the Dow. This week’s price action has thrown a potential spanner in the works for bulls. Despite a record-setting Q2 earnings season in which a staggering 87% of large cap companies beat earnings and revenue estimates, the major indices have rolled over this week and are currently testing support.

Looking at the DJIA specifically, prices have broken back below the 35,100 level to test the 50-day EMA near 34,800 this morning. The critical area to watch moving forward will be the bottom of the 9-month rising channel in the 34,500 zone; a break below that key area could open the door for a long-awaited -5% (or more) pullback, with the next logical levels of support coming in near previous lows at 33,750 or the 200-day EMA all the way down at 32,700:

Source: StoneX, TradingView

Of course, the recent track record and general “buy the dip” zeitgeist points to new highs in the index sooner rather than later, so if the Dow can hold today’s low and rally back above 35,100 next week, we could testing the 36,000 level by September.

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