DJI outlook: Getting down with the Dow

It seems the days of simply buying the dip and hoping for the best are ‘long’ gone, with rallies petering out and reversing as market oscillate within weird and wonderful ranges. Whilst this is less than ideal for trend traders of higher timeframes, it can provide swing trading opportunities in both directions for bulls and bears. Today we look at the Dow Jones which has seen momentum turn swiftly lower, in line with appetite for risk.

US indices YTD returns:

• Nasdaq 100: 16%
• S&P 100: 8.7%
• S&P 500: 6.5%
• Dow Jones: 0.5%
• Russell 2000: -2.2%

Tech stocks have been the clear winner so far in 2023, thanks in part to a weaker US dollar, bets that the Fed are approaching their terminal rate and that they could potentially cut rates this year. Yet as this earnings season has so far highlighted, tech stocks are not a good representation of the broader market with around half of the S&P 500 companies trading lower for the year. Furthermore, mega-cap stocks such as NVIDIA and Meta have supported the broader index with 84.5% and 74% rallies YTD respectively. Therefore, to bet on a broader market upswing is to bet that underperforming stocks can rally higher whilst the love of tech stocks remains in place. That doesn’t look particularly likely over the near-term.

Momentum turns lower on Wall Street indices:

A look at the weekly charts of the three major Wall Street indices reveals a couple of points. The Nasdaq has carved out a bullish trend this year and broken above its 2022 highs, which is something the S&P 500 and Dow Jones has failed to do. And with momentum pointing lower for all three indices, the Nasdaq is now back beneath its 2022 high. Perhaps its bullish trend will remain intact and prices will now retrace towards trend support, which could provide bears with short opportunities over the near-term.

But we would prefer to short the underperformers during downturns (such as the Dow or S&P 500) before seeking bullish opportunities on the outperformer (the Nasdaq 100) should momentum turn higher for all three indices.

As the Dow has been the weaker performer this year, remains beneath its December low and has made the weakest attempt to test the 2022 high, we prefer short opportunities on the Dow.

Dow Jones (DJI) daily chart:

The Dow produced a prominent rally in October before topping out in December – a level it has struggled to retest since. January and February provided very choppy trading conditions and a triple top around 34,300. And despite an 8.5% from the March low, it has struggled to retest those highs. Also note that the recent rally petered out around the February VPOC (volume point of control) and daily trading volumes are increasing with falling prices, as bears step into the market. Ultimately, each rally produces a lower high and choppy trade as the market lacks the ambition to follow the Nasdaq higher.

• The bias remains bearish below 33900 and for a move down to 32,370
• We’d consider fading into rallies within the range of the past two days (which could help increase the potential reward to risk ratio)
• A break below 33,000 brings the 33,2758 high into focus (near the March VAH – value area high) and 200-day MA
• Should we see widespread risk-off across global markets, we could then consider lower targets around 33,265, 31,837-32,000 (March VPOC) and YTD low

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge