Wednesday Futures Thoughts – Order in the Chaos
Bad economic news is sweeping the wires in this presidential election year. The financial sector is being hit hard by past mistakes and critical commodities are trading near all time highs.
Fundamentally, the economic future looks to be in turmoil. Hereâ€™s my way of putting some order in the chaos when trading the DJIA. Letâ€™s first look at the DJIA technically and fundamentally as it stands today, then a potential plan for trading in the near future will be laid out.
The technical picture
The DJIA is trading below its 50-day and 200-day Simple Moving Averages. As you can see from the chart, the 200-day SMA stopped the DJIAâ€™s advance cold the last two times.
A textbook double top was formed after the second attempt to breach the 200-day SMA failed.
Technical Analysts would call this a clear short term topping formation on a daily time scale. Price dropped below the 50-day SMA, then advanced back to the critical 50-day SMA, failed to break it and dropped again.
In my opinion, the DJIA is exhibiting the classic stair step down pattern – down, then a small bounce, down again, and so on. Remember, markets rarely go straight down.
A theory is that a straight down move would defeat the purpose of the marketâ€™s role to bring in the maximum amount of capital during declines.
Every bounce brings in more money for the market machine to munch on; a straight down move wouldnâ€™t lure much new money trying to catch the reversal. Technically, this looks like the first stages of a prolonged decline in the DJIA. However, it is important to always keep in mind that bear market rallies can be very sharp and severe.
The fundamental picture
Things look bleak for the DJIA financial components. Bank of America
PowerRating), JP Morgan
PowerRating) and American Express
PowerRating) are simply not looking solid right now. American Express is the third heaviest weighted company, Bank of America is the 6th heaviest and Citibank is the 10th.
On a positive note, presidential election years are normally positive for the DJIA. However, the market hates uncertainty far more than who wins the Oval Office. So if there is any trouble with the election, expect sharp selling on the news.
I believe the Dow E-mini YM is the best tool the active trader can use to trade the DJIA. I utilize a channel system to place some order on the YM chart. This is just my opinion of course, and I say this for educational purposes only.
This system was described in detail in a previous article, so I will simply provide the basics here. Today and until price breaks out, the upper channel line in the YM is 12503 and the lower line is 12397. The system stays flat in between these figures and goes long or short when the upper or lower figure is broken by a 3-minute chart bar. Right now, the system is flat.
I have a strong bearish bias in the DJIA presently. However, it is important to keep in mind that profitable moves will develop in both directions for the nimble swing trader to capture.
this is for educational purposes only and should not be construed as trading/investment advice”
Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.