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Dow Jones Industrial Average technical analysis: will the index go higher in August?

The price will likely become choppy next month

The Dow Jones Industrial Average has rebounded 47 per cent after tumbling in March as the Covid-19 virus spread across the US. The technicals are positive but the index is running up against resistance. Here, we will analyse what technicals project for the index next month.

Value stocks have lagged

The Dow has rebounded sharply since March, climbing nearly 50 per cent, but most of the gains have been driven by Apple and Microsoft. Over the past 30 days, Apple has rallied slightly more than 20 per cent while Microsoft has increased by nearly 13 per cent. This compares to ExxonMobile and Chevron which are both down nearly 7 per cent.

The Dow is split between the companies that will outperform during a Covid environment and those that are unlikely to be able to survive during an extended pandemic. With oil prices remaining near $40 per barrel, many of the oil producers are unable to make money. Even some of the large healthcare and drugs companies such as Pfizer, Merck, and Johnson & Johnson have experienced negative returns over the past 30 days. To gain traction and value shares to catch up to growth, economic output will need to recover and it is still a concern as many US states delay their plans to reopen.

The seasonals are negative and volatility remains elevated

Historically, the Dow has underperformed during August. During the past 10-years, the Dow Industrials have declined 60 per cent of the time for an average loss in August of 1.5 per cent. This compares to July when the Dow Industrials are normally higher 80 per cent of the time for an average gain of 2 per cent. 

Implied volatility on the Dow Industrials also remains elevated. While the current reading of 30 is well off the highs seen in March at 71, the average during 2019 was close to 15, nearly half the current reading. In fact, the highest reading in 2019 was 30. This should tell investors that volatility remains elevated and fear is still prevalent. 

Dow Jones Industrial Average analysis: the technicals

The Dow Jones Industrial Average has tested resistance levels near a downward sloping trend line that comes in near 27,050. A close above this level would be considered a short-term breakout. Short-term support is seen near the 50-day moving average at 26,308. Short-term momentum has turned positive as the fast stochastic recently generated a crossover buy signal. Medium-term momentum has also turned positive as the MACD histogram is printing in the black with an upward sloping trajectory which points to higher prices.

The bottom line

The Dow has recovered substantially but the returns are bifurcated between technology growth stocks and value stocks. For value stocks to outperform they need economic news in the US to improve and the spread of the virus to subside. This does not appear to be the trend and economic data for July that is released in August is likely to disappoint. Additionally, the seasonals are generally negative in August and volatility remains elevated, which means that the Dow Industrials will likely experience choppy market conditions in August.

USA 30
Daily change
Low: 26457
High: 26698

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