- For today (05 July, 2022), this technical analysis applies ONLY IF AND WHEN Dow Jones crosses up 30650 after the market open. It can also apply for swing traders that would like to consider a Long, but only if and after Dow Jones futures (YM) closes a 4 hour candle above 30650
- Credit Suisse slashed its end of year target for the S&P, which expedited selling today
- We wait for Dow Jones to cross up 30650, and if it will do so, we then offer to consider a contrarian bet that offers a low probability to win, but compensates with a high reward vs risk ratio, as presented in the technical analysis video below
- Entry price for the Dow Jones Futures: 30650
- Stop Loss: 1% below the entry price
- Two take profit targets, averaging a reward vs risk ratio of almost 5.5 to 1, where the risk is 1%. This is a fantastic trade if and when it plays out
- Always trade the Dow Jones Index or futures at your own risk only
What is the Dow Jones Industrial Average (DJI) and why you should care about it
Back in the 1890s, the need for a tell-all ‘index’ of the economy’s mark-up stocks trading on the New York Stock Exchange and NASDAQ led to the founder-editor of the Wall Street Journal, Charles Dow using a ‘simple arithmetic average’ method to calculate an index for twelve top-selling industrial stocks. Eventually this iconic index was restructured to its current form as the Dow- Jones Industrial Average (DJIA) or the Dow30 limiting the index to 30 blue-chip companies. The index has become the fair-weather indicator of the economy!
DJIAverage: The start of stock market ‘technical analysis’
By the end of the First World War DJI Average became one of the first ‘technical’ inputs for investors and analysts to understand market performance of the stocks on the index. Today, technical analysts use a wide range of old-school interpretations and statistical techniques, tools built using emerging tech such as Artificial Intelligence, Machine Language and Blockchain to give investors a humongous range of deep-level market movement inputs.
DJIA limitations and criticisms
But many analysts do not accept the DJIA as an index for the actual state of the economy since it represents less than 1% of the nearly 5,300 commonly traded stocks on NYSE and NASDAQ. One of the biggest criticisms of DJIA is that you cannot gain insight into macro-level economic health since it does not measure market capitalization. Another criticism is that the Dows Average is under conflicting pressures! Some analysts believe DJIA shows downward bias in the long term when using market value weights such as S&P 500. However, DJIA has shown upward bias when geometric averaging is used for every stock.
Secondly, in its current form DJIA reconciles issues arising from simple arithmetic average with a ‘Dow Divisor’ mechanism. The Dow Divisor is a constant that is found by dividing the Sum of the stock prices of the companies by the DJIA Price. It is used to find the impact of one-point move in any of the 30 stocks on the Dow. Under exceptions, the value of the Divisor is changed so that the value of Dow remains stable.
Hence, there is much criticism of DJIA’s PRICE-WEIGHTED preference over the market – weighted index used in indices such as S&P 500, since some of the constituent companies in DJIA gain an advantage over others on the index.
For example, when a company with share price of $150 will exert five times more influence on the DJI Average than an important company for the economy with lower stock price of $30. As a result, money managers often use alternative indices such as the S&P 500 Index to gain detailed insights about the overall performance of the stock market.
What is the Dow Jones Futures?
Dow Jones Futures are contracts which allow investors to speculate the rise and fall of the broader stock market. Typically commodity futures contracts need physical delivery of the asset or the underlying product. However, Dow Futures allowed traders to hedge risk to speculate profit and settle in cash. The contract is drawn between the buyer and seller of an underlying asset at a price that is predetermined, but in the future. The contract will be legally binding for the sale at the defined price even when the value of the underlying asset changes on the Dow giving speculators an opportunity of profits and losses.
Currently, two contract sizes are available on Dow futures for trading on Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME). The first is the mini-Dow or the E-mini priced $5 per tick on DJIA. The second is the micro E-mini at one-tenth of the former’s sizes at roughly 50 cents every point in January 2022. Then, there are quarterly-listed Dow futures with delivery made in equivalent value in cash.
Typically, DJIA futures contracts closely follow index value and continue to trade in the hours after US stock markets close. The prices are commonly determined by external influences such as release of economic data, monetary policy changes in related economies and even geopolitical events.
The most attractive feature of Dow Jones Futures is the ‘leverage’ – you will only have to invest a small value of the contract. Besides, you can quickly short-sell the broader stock market instead of individual stocks. When a trader buys a $5,500 E-mini Dow contract and the futures contract is valued at $5 for each point on the DJIA, a sale at the index point of 30,000 from the earlier index point of 29,000 allows traders to double earnings of $5,000 on trading. But the catch is that the losses are also ten times magnified.
So you can begin to trade Dow Futures by opening a trading account, identifying the commission charges of a trading platform and selecting an appropriate Futures Trading Strategy.
In the following sections let’s explore the ways in which analysts interpret Dow Jones to gain technical advantage and pick profitable stocks…
What does Technical Analysis on the Dow Jones mean and how can it help you?
Charles Dow strongly believed that the measure of the overall stock market was representative of the condition of the economy and vice versa. Therefore, technical analysis of the market would indicate the condition of the economy accurately; predict the movement of market trend and direction of individual stocks.
Dow’s beliefs continue to be the pillars of technical analysis:
Efficient market values represent the various reasons that impact the price of the security
Any market price movement has an identifiable pattern and such trends are likely to repeat in the long term. Over time, technical analysis has evolved from the above fundamentals of Dow’s Theory to construct a framework that uses three general assumptions
Markets will discount everything since stock prices will include all market factors
Prices always follows a trend
Price movements are repetitive in nature since market psychology thrives on fear or excitement emotions
Primarily, technical analysis generates trading signals for the short-term based on charting tools to improve the overall valuation estimate of strength or weakness of a security in comparison to the market or its own sector. Hence, it is different from the standard practice of analyzing financial data such as sales and earnings to find the value of securities or fundamental analysis.
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