Dow Jones technical analysis: will the index price rise high?

The Dow will likely need a US stimulus plan to be passed to continue its upward trend

The Dow Jones Industrial average has been bucking the trend in the major average in late February as the Nasdaq, Russel, and S&P 500 move lower. Many of the companies in the US 30 represent sectors that underperformed in 2020. This includes energy, air travel and financials. There appears to be a change in asset allocation in late February, which has allowed the Dow Jones Industrial Average to outperform. 

Historically, the Dow has underperformed in March. The trend in the Dow is upward sloping but positive momentum has stalled.

Sectors are outperforming

The Dow Jones  has several heavyweights that have outperformed in February. This includes financial stocks, energy stocks and airlines. All three of these sectors underperformed technology and communications in 2020. Airlines have rallied as air travel picks up. Energy shares have been buoyed by a strong rally in crude oil prices. US yields have also backed up significantly rising from 50 basis points in August to 130 basis points in February. The steepening in the shape of the US treasury yield curve has benefited financials that can borrow at short-term rates and lend at long-term rates. These sectors have helped the Dow Jones Industrial Average hit all-time highs in February.

The seasonals are mixed

Historically, the returns of the Dow Jones Industrial Average are mixed in March. Over the past 10-years, the Dow Jones Industrial Average rose 60 per cent of the time with an average loss of 0.4 per cent. During the past five years, the Dow has declined 60 per cent of the time with an average loss of two per cent. 

Dow Jones analysis: technicals

The Dow Jones Industrial Average hit an all-time high in February and continues to drift higher. The 10-week moving average crossed above the 50-week moving average in August which means that a medium-term uptrend is in place. Short-term momentum is positive but choppy. The fast stochastic continues to generate crossover buy and sell signals. Prices are overbought. The current reading on the fast stochastic is 95, above the overbought trigger level of 80 which could foreshadow a correction. The relative strength index (RSI) is diverging. As prices move to all-time highs the RSI has failed to break to new highs which reflects a divergence in momentum. Medium-term momentum is flat. The moving average convergence divergence (MACD) histogram is printing in positive territory with a flat trajectory which points to consolidation.

The Dow Jones: how to trade the index? 

While the Dow has made new highs, without help from technology and communications it is hard to see the index continuing to rally.  The rally has been led by the 2020 underperformers, such as energy, air travel and financial companies, which are the reopening trades. The seasonals in March are mixed and recently have been negative. The RSI (which is a momentum oscillator) is diverging which means that momentum is stalling. Prices are overbought. Look for the Dow to stall out in March and at best show small positive returns.

Trade USA 30 - US30 price chart

USA 30
Daily change
Low: 34592
High: 35284

FURTHER READING: Shanghai Composite analysis: is higher price trend slowing down?
FURTHER READING: S&P 500 technical analysis: stimulus helps prices

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