The Dow front runs its own theory

There’s more than one way of measuring success. And markets are no different. If we look at how strong the rebound has been for US markets since the January low, technology stocks are the leaders. Since then, the Nasdaq 100 has risen 9.7% compared with 8.8% for the S&P 500 and 8% from the Dow Jones.  Yet the Nasdaq 100 only managed to close marginally above its 200-day average yesterday, whilst the Dow Jones closed (and held above it) since January 31^st.  Moreover, neither the Nasdaq or S&P 500 closed back above their previous swing highs whilst the Dow Jones managed just that yesterday.

And that brings us on to one of the tenants of the Dow theory. Historically, both the Dow Jones Industrial and transportation indices were required to close above previous highs to confirm a move. Whilst this is still used, traders can also wait for similar confirmations from the Dow, Nasdaq and S&P 500. As the Dow Jones was the only of the three to breakout then it is too soon to confirm it as such, using the Dow theory.

We also have US inflation data today which, if strong enough to spook markets, could weigh on equities and send them all lower. But regardless of the outcome, we look at the Dow Jones Industrial index on the daily and four-hour chart to highlight a couple of scenarios and key levels to switch the directional bias.

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