The updated monthly and weekly bar charts for the Dow Jones Industrial AverageSM (INDU) provided below encompass trend, volatility, volume, and momentum information. Chart specifications for both charts are provided next and chart assessments below each view. In the assessments the term “alert” indicates a warning while the term “signal” indicates a bullish or bearish action for the indicator. These are not suggestive of a trade signal since the tools have not collectively been back-tested. A daily chart will be provided later in the week.
A bar chart provides volatility information by noting price range for the bar for the period.
- Simple moving averages [SMAs]
- Linear regression channel [LRC] constructed from 7/10/09 – 7/9/10, extended left & right
- On Balance Volume [OBV] cumulative indicator
- RSI with SMA [14-period with 9-period SMA]
- MACD [19, 39, 9 for monthly and 12, 26, 9 for weekly]
The two momentum tools added to this chart primarily vary construction and range:
Relative Strength Index [RSI] from Welles Wilder which is a range-bound oscillator that measures the price of an index or security against its own price x-periods ago. Basic applications include monitoring overbought/oversold regions and assessing confirmation or divergence with price trends.
In addition to momentum applications, RSI can provide insight on bullish versus bearish over tones for trend when applying Andrew Cardwell techniques (see July 2008 Analytical Toolbox articles for more information).
Moving Average Convergence-Divergence [MACD] from Gerald Appel moves freely and uses lagging MAs using a leading calculation. As a result, it can be a nice complement to RSI even when similar speeds are used.
While seemingly basic due to its universal availability, MACD is a unique indicator that uses lagging data (moving averages) and applies a leading calculation to it (rate of change).
Figure 1 Monthly Chart of INDU with Trend, Volume & Momentum (6/30/97 – 1/18/13)
The long-term trend for INDU is bullish with price currently in the upper area of a long-term LRC. It is possible for price to close the month below the middle regression channel line; however, for now that line will serve as support. The 10-month SMA is also trending upward providing an objective long-term assessment of the bullish trend.
Volatility appears normal with the bars in six of the last seven months representing a similar, moderate range. The most recent persistent volatile period appears to be in late 2011.
RSI has been diverging from price since April 2011. It is possible for January’s closing RSI level to resolve this divergence; however price will need to strengthen a bit for this to occur. In terms of bullish/bearish tone, RSI has remained above 40 since 2010 and is currently above the 60 level as well. With a bullish range of 40-80, this leaves room to the upside for INDU on a monthly basis.
MACD is set to a slower speed [19, 39, 9] to delay a bearish cross once a long-term bullish trend is established. It minimizes the potential of being whipsawed out of a persisting trend. The MACD bullish set-up has been in place since late 2009 and is starting to wane in strength with a fast beginning to converge with the slow line. Here month end data is required to complete the assessment. The line drawn in which emphasizes a lower high is not divergent from price since the October 2007 price peak was higher than current levels (that is, price also has a lower high).
OBV is a cumulative indicator since it applies all of interval’s volume to its calculation. As a result, the data point calculated can change quite a bit during the period. For this reason it’s best to only assess completed intervals (currently December 2012).
OBV is bullish, successfully testing a more gently trending bullish support line in November 2012. Although it is waning in strength it will encounter two areas of support by May 2013. Such intersecting areas of support or resistance tend to be stronger. A break of the current support line should be met with support at the potential support line drawn using the November low.
Overall INDU is long-term bullish with some alerts being given on the momentum side.
Figure 2 Weekly Chart of INDU with Trend, Volume & Momentum (1/18/08 – 1/18/13)
The weekly chart also displays a long-term bullish trend for INDU with price currently in the lower area of a long-term LRC. The 20-week SMA approximates a 100-day SMA and is also trending upward giving an intermediate- to long-term bullish assessment on an objective basis.
This chart highlights a really important aspect to viewing price data when a variety of tools are added to the chart. Although it may appear that price is currently below the previous INDU peak from early October 2012, last week’s price action exceeded those levels. The upward bias provided but eh LRC and the fact that price has a greater distance to travel to reach the middle regression line makes it appear price is lower. Analysts and traders may want to include horizontal grid lines on a chart to minimize these issues or can consider a single horizontal line denoting a previous high or low.
Volatility is subsiding a bit after a volatile move upward the first week of the year. A shortened trading week ahead may keep the range at similar level. Note declines tend to be accompanied by more longer, more volatile bars.
RSI has been diverging from price since Sep 2012. In terms of bullish/bearish tone, RSI found support at the 40 level in Nov 2012 and remained above it in Jun 2012 and Nov 2011 keeping RSI in a bullish range since Oct 2011. It is currently above the 60 level with strength slightly waning.
MACD is set to the default speed [12, 26, 9] so intermediate-term moves are more easily monitored. MACD has been diverging from price since May 2011; however, the divergent line only goes back to March 2012. This is to reflect some excesses that were worked out in Sep 2011 with a MACD cross below its zero line. A bullish cross of the fast line above the slow line occurred the week ending 1/11/13 with the bullish action continuing in the most recent week.
OBV is bullish, successfully testing a long-term bullish support line in November 2012. It is slightly above peaks set Apr 2011 and Sep 2012; however, if it fails to move higher in the coming weeks, this level could represent a triple top for the indicator.
Overall INDU is intermediate-term bullish with some alerts being given on the momentum side.
Resources to Consider
Gilbert Raff, Trading the Regression Channel, Stocks & Commodities, V 9:10 (403-408).
Wilder, J.W. (1978). New Concepts in Technical Trading Systems. Winston-Salem, NC: Hunter Publishing Company.
RSI: Clare White, CMT, Analytical Toolbox: Cardwell Techniques with the RSI & Analytical Toolbox: Speaking with Andrew Cardwell Parts 1 & 2 ”, Optionetics.com, July 2008.
MACD: Appel, G. (2005) Technical Analysis: Power Tools for Active Investors. Upper Saddle River, NJ: Prentice-Hall, Inc.
Colby, R. W. CMT (2002). The Encyclopedia of Technical Indicators. New York, NY: The McGraw-Hill Companies.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
Questions for Clare? Please visit the discussion board on the homepage of Optionetics.com.