Millennium levels to watch on the Dow Jones Industrial Average
“Stock Investors “Watch Barrel For Seasonal Weakness Over Next 3 Months‘”
– MarketWatch, July 28, 2021
“Investors should sell stocks and raise funds as bearish indicators pile up for S&P 500, says BofA“
– Market Insider, July 29, 2021
One equity benchmark that I haven’t provided analysis on for a long time is the popular Dow Jones Industrial Average (DJI – 34,935.47). As the market has risen in recent months, the Average has removed multiple psychological barriers associated with Millennium Levels. And with each passage above a millennium level, the percentage lead required to reach the next level by 1000 points is less than previous intervals.
However, as the chart below clearly shows, these round 1000 point intervals on the DJI have provided significant near term support and resistance. But a pattern has emerged around the 34,000-35,000 area which is similar to the behavior that the DJI exhibited around two other psychological round number levels – 30,000 and 31,000 – from November 2020 to March 2021. Specifically, During that four month period, the 30,000 level briefly served as an area of resistance and hesitation, before serving as a major support level in late January after falling from 31,000. 30,000 and 31,000 were finally cleared through customs at the beginning of March.
Likewise, the 34,000 and 35,000 millennium levels have proven to be significant support and resistance levels since mid-April, for the most part anyway. I qualified this because there was a significant break below 34,000 in mid-June, with a possible low at 33,290. Mid-June low could turn out to be the “head” in a bullish reverse “head and shoulder” pattern, if a break above its neck line in the 35,000 zone occurs.
I’m highlighting the different models now because we come down to four months where the average danced around 34,000 and 35,000, which is how long she played with 30,000 and 31,000 before leaving. 31,000 in the dust for good in early March.
Additionally, a break above 35,000 would complete the inverted bullish “head and shoulder” pattern, with a targeted move to 36,710 within three months, rising nearly 5% in just three months. Such an action would be at odds with the historic seasonal weakness we are entering. Specifically, it made headlines amid growing uncertainty about the delta variant and how it could hold back economic growth. Then again, a bull with a contrarian mindset might prefer more people to be aware of the looming seasonal weakness than the potential bullish implications of a break above 35,000.
If the Dow Jones breaks out and maintains a move above the 35,000 resistance, I would expect at least the S&P 500 (SPX – 4,395.26) to trade in the bullish channel that is in place since mid-november (which I posted in this weekly comment). Repeating what I said several weeks ago, as long as the SPX is trading in this channel most of the time as it has this year, it is a win for the bulls as the upper limits and lower end of this channel increase over time. There have been only 13 close below this channel on 145 trading days this year, and only three close below the channel since May 12.
For short-term traders to be rocked and shorts to be bolder after months of hedging activity, I think it will take at least a week of continuous trading below its channel, which is between 4,324 and 4,342 this week. A break in its 50-day moving average – which has supported all the pullbacks since late March and currently sits at 4,284 – could be scary in the long run. However, I think it’s worth focusing on the SPX 80-day moving average as well, which currently sits at the May high and July 19 intraday low. The 80-day moving average marked the low in the SPX in early March following the most prolonged pullback to date in 2021.
Short term resistance for the coming week starts at its channel top of 4,458. But the biggest level is at the weekend, 4,475. Not only does this mark the channel high at Friday’s close, but 4,475 is double the last year’s closing low at 2,237.40.
The SPX enters the week and is trading at about the same level as in mid-July, when it was at the top of its channel. Short-term equity option buyers, however, do not display the optimism that was present before the index fell sharply from the top of the channel. While this is also not an extreme indication of pessimism, note that the 10-day average buy / call volume ratio (to open), only on stocks, on components SPX is at its highest level since late May, even though the SPX hit all-time highs last week. In addition, according to a poll last week, active investment managers indicated that this group was rocked by the latest pullback as they are not close to a fully invested long position, as they have been. several times this year.
As we move into earnings season, companies are once again allowed to repurchase shares, which they cannot do in the weeks leading up to their earnings release. On July 24, a Barron’s article noted that JP Morgan Chase (JPM – 151.78) disclosed data showing that companies have already repurchased more shares in 2021 than in 2020. If this trend continues in the weeks to ahead, those that sharply headed for the sidelines during July’s brief pullback could be another supporting factor during this well-publicized and historically weak seasonal period.