DOW Approaching 10000 — Now What?
October 14th, 2009
Despite the fact that the Dow Jones Industrial Average is comprised of only 30 stocks, it remains one of the most widely followed barometers of the overall stock market. Recently the average has undergone some significant changes in its components due to the impact of the credit crisis on the likes of Citibank (C) General Motors (GM) and American International Group ( AIG), which were recently dropped from the index. Unlike the SP500 or the Nasdaq Composite, the DJIA remains a price weighted index as opposed to market capitalization. The average currently has three components from the Nasdaq: Microsoft (MSFT), Intel (INTC) and the new kid on the block Cisco Systems (CSCO). The remaining components trade on the NYSE Euronext and represent the other segments of the American economy such as Pfizer (PFE) , Johnson and Johnson (JNJ) and Merck (MRK) for pharmaceuticals or Kraft Foods, Coca Cola and Procter and Gamble for consumer staples. The question posed by Nicole Wachs of TradeKing (see: http://community.tradeking.com/members/tk-all-star/blogs/44528-dow-10-000) is when the DOW hits the psychological 10000 level does it mean the end of the current bull or will it usher in a new bull. While nobody has a crystal ball, I like to use technical analysis to develop expectations of what could happen. I am in the camp, that given a good earnings season, that when the DOW passes the 10000 mark, we may be in for another leg up. I’ll use a chart to explain my rationale. The following chart is courtesy of Stockcharts.com.
As the above chart illustrates, we have an inverse head and shoulders formation on the weekly chart. If the price of the DOW completes a higher pivot low above the 10000 level, there is a good probability that the DOW could continue to rise to its previous level in the 13000 to 14000 level. While I would not look at the DOW in isolation, if we continue to see correlation in the other major indexes people follow, I think this is a good pointer to improvement in the economy.
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