The Dow Jones Is on the Brink (DIA)

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The SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), much like the broader U.S. stock market, has been stuck in a defined sideways range for most of 2015. Yet if we look a little closer under the hood, there has been some notable relative and absolute weakness in this index versus the other major benchmark indices as of late.

aapl stockWith today’s July jobs report looming large, the news could further make or break the near-term direction of the DIA ETF.

Of course, you can’t talk about the Dow Jones Industrial Average without considering this price weighted index’s top holdings. Currently the two most heavily weighted stocks in the index are Goldman Sachs Group Inc (NYSE:GS) and International Business Machines Corp. (NYSE:IBM).

Together these two stocks make up about 14% of the index, so price movements in these stocks have a meaningful impact on the index. To wit, IBM stock lost about 10% since mid July, and GS stock is about 4% off since mid-July, which clearly has weighed on the index.

For perspective, let us also understand that the DIA ETF has shown relative weakness versus the S&P 500 year-to-date, and in particular since early to mid-July.

DIA ETF Charts

The ratio chart where I divided the Dow Jones by the S&P 500 shows a clear breakdown over the past three weeks or so.

DIA vs. SPY
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The implied volatility of the broader market as represented by the CBOE Volatility Index, or VIX, over the past two days left behind a curious bullish reversal where a brief dip below the 11 mark on Wednesday led to a sharp rally on Thursday. Could Wednesday’s dip have been a capitulatory move by the bulls? (Option traders likely bought cheap protection on Thursday ahead of Friday’s jobs report.)

VIX rocket launch
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Looking at the multiyear chart of the DIA ETF, we see that the 2009 trend remains intact, but that the year-to-date price action has come on much less upside momentum (not surprisingly), which leaves behind on the chart some serious negative divergence between price and momentum. None of this is an immediate call to sell the index, but it is important context for when looking at the daily chart next.

DIA weekly
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On the daily chart, we see that the DIA ETF made three notable lower highs since the top in mid-May. Furthermore, the late July rally led the DIA to retest its 200-day simple moving average from below and promptly got rejected. The Dow Jones is thus now the only of the major benchmark U.S. indices trading well below its 200-day SMA.

DIA daily chart
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From here, while the reaction to the July jobs report can push this index anywhere, a next downside target is around the $170 area, which is horizontal support from December 2014 and January of this year, as well as a 50% retracement of the entire rally off the October 2014 lows up to the May highs. This downside target/support area extends down toward the $168 area, below which no support is to be found until the October 2014 lows in the high $150s.

Tactical traders could wait for another oversold bounce to sell short the DIA into the $168-$170 target.

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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/dow-jones-industrial-averag-dia-etf-brink/.

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