Thursday, July 30, 2015

A Technical Look At The Dow

Barron's was out this week with an interesting take on the Dow Jones Industrial Average and its recent encounters with several key technical levels.  

In the magazine's "Getting Technical" section, columnist Michael Kahn notes that, among other things, the: 

"Select Sector SPDR Industrials exchange-traded fund ( XLI ) is in serious retreat. And that does not bode well for the market and arguably for the economy a few months down the road.  

Though dominated by General Electric ( GE ) with its 10.2% weighting in the ETF, XLI still gives a good representation of what is happening to the sector. Peaking in February, the ETF has lost roughly 9% through Monday’s trading (see Chart 1). And this month, it joined utilities, energy and basic materials as the only ones with moving average death crosses in place. Each has its 50-day average below its 200-day average and that is not a healthy condition."

He goes on to note that the index failed to breakthrough prior support during the most recent rally in equities and has fallen below its long term trendline that dates back to August 2011.  He adds:

"But what I find more interesting is that the last time the market suffered a significant correction, aside from last year’s Ebola-inspired mini-panic, the industrials broke down first. That was in the summer of 2011 and the industrial sector broke down about a week before the broad market did (see Getting Technical, “Industrial Stocks Are Shutting Down,” August 1, 2011). Although we cannot make a rule out of so few observations, it probably is a good idea to keep cash levels higher than normal.

From the long-term view, the industrial ETF is now approaching a Fibonacci 61.8% retracement of its October 2014-February 2015 rally. It has already dipped below the major trendline drawn from the end of the 2011 correction although given the elapsed time and price movement involved I do not think this was a breakdown - yet.

Should the sector keep falling, the breakdown would be undeniable and a move back to the October 2014 low would be in cards. That would be a drop of roughly 7% from current levels."
We found this article to be an interesting take on the current environment and definitely something that bears watching.  With industrials being the canary in the coal mine before the 2011 broad market breakdown, they may deserve extra attention in this scenario.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

Ryan on: Ryan Worch on LinkedIn, Ryan Worch on Twitter | Ryan Worch Bio