Dow tests ‘crisis defence’ line

The Dow Jones Industrial Average tests a key long-term key indicator. If it breaks, volatility could increase

Summary

Dow Jones Industrial Average futures are testing a key long-term moving average again, with added significance from the market’s rising sense of crisis.

Crisis defence

The 200-day moving average (200-day MA) is a popular trending indicator with traders as it offers an objective way to orient activity relative to validated sentiment. The assumption is that when a market crosses the threshold, negative sentiment can then be judged to be more ‘negative’ than the market was above. As per many common technical indications, as unscientific as they sound, there is clear evidence of a ‘feedback loop’ in terms of market reactions to the 200-day average. Such reactions increase the probability of volatility when prices get near the 200-day MA. As international trade tensions escalate, dragging U.S. industrials lower, the Dow future’s 200-day MA trend has added potency.

Last line

On a technical basis, the Dow future’s 200-day moving average is among factors that have supported the index future on four clear occasions this year during April and May. (Please note the chart below shows ‘continuous’ Dow Jones futures prices with data from various contracts combined to create an unbroken series). The ‘daily closing’ basis of activity around the 200-day MA is crucial. So far, this year, spikes through the moving average have not been sustained till the close of trade. The psychological significance of this is that pessimism was limited enough on those occasions to allow the market to bounce above the 200-day MA. Potentially, that avoided sharper falls in the immediate term.

Watch out

At the time of writing, the future, is trading narrowly below the 200-day moving average with under two hours of trade remaining on Wall Street. Note that the future’s latest attempt to best medium-term resistance between 24824-24991 failed earlier in the month, albeit prices peaked well above the range on 11th June at 25400. Rising trend line support broke last week. (That line originated in early 2016 and has been validated several times since.) Price violated the trend during two earlier episodes of volatility this year, though price subsequently reclaimed the topside afterwards. Still, repeated breaks weaken the technical strength of the line. As the future skims its 200-day average, the only strongly corroborated support below is 23283. Any breach of the latter conjures a scenario of far deeper investor anxiety than Monday’s. It is not our base case. However, a close below the 200-day moving average would undoubtedly be a symbolic moment that produces real-world volatile effects.

Figure 1 - technical price chart: Dow Jones E-Mini Future (Continuation)


Source: Thomson Reuters and City Index

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