Dow Jones: Making Sense of Conflicting Signals

Our technical charts are expecting the Dow Jones Industrial Average to continue its bullish run. After a dismal August, the Index has been up for 7 out of the 8 trading days in September. And the trend is likely to continue.

The MACD line for the Dow has crossed zero, leading to a bullish centerline crossover. Positive MACD indicates that the 12-day EMA is above the 26-day EMA and a further increase in positive values means that the upside momentum is increasing. It is trading above the 20, 50, 100 and 200-das moving averages, which suggests a strong buy.

dow-30Our technicals have a strong support from market news. With Janet Yellen likely to head the Fed, the market has taken a bullish turn and S&P futures are trading higher.

While our sector signals are not strong on price and volume information, we have an interesting situation with the index constituents. While the index is providing strong buy signals, none of the 30 constituents of the Dow are backing it up. There are two reasons for this:

First, since we are at a cusp of changes in the constituents, the signals are not well defined. On 23rd September 2013, the DJIA will drop Hewlett-Packard (NASDAQ: HP), Alcoa Inc. (NYSE: AA) and Bank of America (NYSE: BAC); Visa (NYSE: V), Nike (NYSE: NKE) and Goldman Sachs (NYSE: GS) will take their places.

Secondly, the psychological consequence on the Index due to the risk-on trade is not being reflected in the individual constituents. The markets are more bullish than what the constituents recommend.

But the BUY signal on the Dow remains and we ask investors to not shy away from it.

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