Posted in
Technical Analysis
By: Tom Gentile
on May 16th, 2023
We typically educate you on assessing the market direction by using the SPDR S&P 500 ETF Trust (SPY), an ETF that tracks the S&P 500, as both of them represent the markets better than the smaller major index the Dow Jones Industrial Average or the Dow 30 aka the Dow.
An ETF that tracks the Dow is the DIA or what many refer to and call, ‘the Diamonds’.
We will start this education with a chart on DIA.
The reason we are showing this is the DIA, which represents the Dow, is because it closed below a key Simple Moving Average (SMA) today.
The Simple Moving Average is used as it is most comm only used by the financial news networks and online resources, so this keeps us consistent in our images with theirs.
Longer-term traders use the 50-day SMA, whereas day-traders or Forex traders use an exponential moving average and since we don’t do either we stick with the Simple Moving Average or (SMA).
How Moving Averages are Used
Moving Averages are used for both assessing a directional trend for a market and / or it is used to assess a price support or resistance level.
If a security tests it after coming down in price to touch it that may draw in investors/traders who anticipate a bounce higher in price off that SMA support.
It can potentially work in the reverse as well, where the security runs up in price to touch the SMA which may draw in short sellers who anticipate that SMA acts as a resistance that the security will trade lower from.
The 50-day simple moving average is a trendline that represents the plotting of a securities closing price daily over the past 50-days and then averaged over those 50-days.
plotting of closing prices for a stock, averaged over the past 50 days. This trendline can indicate a stock’s strength or weakness.
The reason it is called a Simple Moving average (SMA) is because it weighs each day’s closing price the same. Contrast that with the exponential moving average (EMA), which weighs recent closing prices more heavily and you can see the difference.
Figure 1 shows the DIA currently in a sideways trend where the DIA is basically the same price now as it was back in early March and since March 31 to present day the stock has traded in a range 330-340.
9-trading days ago DIA broke below the 50-day SMA on an intraday basis but did not close below it.
Today is different in that the DIA CLOSED below the 50-day SMA.
Where that prior breach saw price get rejected and end up higher on the day, today’s close below gives indication there may be a better chance at follow through to the downside.
There is the chance news happens overnight or before market open tomorrow morning that brings some buyers or keeps existing buyers buying and todays price action fails any kind of follow through again, but that is to be seen.
Target Price on Dow or DIA if it Trades Lower or Higher?
Let’s do some anticipation work on the DIA.
We try not to say a security WILL or WILL NOT make a specific price move.
One can have conviction for a security trading higher or lower, but it may not do that. Even if it does it doesn’t guarantee it will go higher or lower to the price amount you expect.
So rather than trying to be in the prediction business, which could lead one to making it personal if a security does or doesn’t do what you predict and lead you to say you are ‘Wrong’, or ‘Right’, one can say the security didn’t move as anticipated.
Less personal and therefor, as we see it, less emotional.
Should DIA follow through and trade lower one can anticipate a move to maybe a Fib retracement percentage price level of the up leg it came from.
Figure 2 represents a Fib Retracement view on DIA.
Should this breakdown fail, and price revert to trading higher, an anticipated price level/target could be back at the previous high at or near $341.03.
Remember these aren’t predictions nor are they a call on where the markets will go.
It is education on how we analyze price action that you can either learn and adopt or at the very least discuss with your broker(s).
App: Toms Option Tools
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.
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