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Dow Jones futures edge higher as bulls target 35,378

Republished By Plato
Republished By Plato

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  • The Dow Jones Industrial Average gained 1.56% in the first two trading sessions this week.
  • DJIA futures rise 0.1% on Wednesday morning.
  • The CPI data for June arrives an hour before Wednesday open.
  • DJIA trades within a symmetrical triangle pattern with bullish price target of 35,378.
  • NASDAQ 100 rebalance could affect Dow Jones negatively.

The Dow Jones Industrial Average (DJIA) has already added 1.56% this week, and Dow futures are ticking higher early Wednesday ahead of the Consumer Price Index (CPI) release for June. At the time of writing, Dow futures have gained 0.11%, while NASDAQ 100 futures rise 0.2%.

The NASDAQ 100 rebalancing announced this week may negatively affect the DJIA however, and it appears that traders are not yet factoring that headwind into their trading view. The weighting of Microsoft (MSFT) and Apple (AAPL) – both Dow holdings – will be reduced in the NASDAQ 100, which should lead to increased selling pressure over the next two weeks.
 

Dow Jones news: June core CPI consensus at 5% YoY

Wall Street analysts are targeting a drop from May’s 5.3% annual core CPI – a measure of inflation that excludes food and energy – to 5% in June. The Federal Reserve has a mandate to keep this figure near 2% growth on an annual basis.

The result, which comes out an hour before the equity market opens in New York, is unlikely to result in a change of view on whether the central bank raises interest rates on July 26. The market is near certain at this point that the Fed will raise the fed funds rate by 25 basis points to a 5.25% to 5.5% range at the FOMC meeting exactly two weeks from now.

Analyst consensus also puts June headline inflation at 3.1%, a stark drop from May’s 4% result. Both the core and headline figure are expected to grow 0.3% on a MoM basis.

On Monday, the Federal Reserve Bank of New York’s monthly Survey of Consumer Expectations reported that US consumers’ one-year inflation expectation fell to 3.8% in June from 4.1% in May. This was the lowest result from the survey in more than two years.

If annual core inflation comes in below that 5% mark, expect both the Dow and the broad market to rally. This is because it lowers the chances that the Fed will go forward with another rate hike after July’s FOMC meeting. In recent Congressional testimony, Fed Chair Jerome Powell stated that two more rate hikes were the most likely event following June’s pause. Last Friday’s Nonfarm Payrolls figure was greeted warmly by the market since new hiring fell below consensus for June. However, continued growth in hourly wages concerned those rooting for an immediate solution to the wage-price spiral. 

Dow Jones news: NASDAQ 100 rebalancing bodes poorly for Dow outlook

Earlier this week, the leadership behind the NASDAQ 100 decided that the growth-oriented index had become too top-heavy. The so-called Magnificent Seven stocks – Apple, Microsoft, Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), Tesla (TSLA) and Nvidia (NVDA) – exploded in the first half of the year to comprise 48% of the index. Market pundits believe this rebalancing will push these seven outliers back down to 40% of the total weighting. 

This means that Dow holdings Microsoft and Apple will both be sold off by a number of NASDAQ 100-following ETFs and funds like the $200 billion Invesco QQQ Trust (QQQ). Wells Fargo put out a research note saying that these two mega-cap stocks lead its “top up-sizers” list.

Thus far, the NASDAQ 100 leadership have not released the precise weighting of the new index, but those figures will be released on Friday, July 14. The new weighting will take effect on Friday, July 21 before its trading debut on Monday, July 24.

“The upcoming NDX rebalance is reducing concentration risk but creating uber-cap selling pressure,” Wells Fargo equity analyst Chris Harvey wrote on Tuesday.

Wells Fargo forecasts that Microsoft stock will have its weighting reduced by 1.8 percentage points and that Apple’s weighting should decline by about 1.7 percentage points. Currently, Microsoft makes up 6.44% of the Dow Jones weighting, while Apple makes up 3.44%.

Dow Jones FAQs

The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.

Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.

Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.

There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable traders to speculate on the future value of the index and Options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.

 

Dow Jones forecast

The Dow Jones index begins Wednesday inside a resistance zone stretching from 34,200 to 34,600. This region has pushed prices lower at least seven times since December 2022. Bulls are still gunning to break above the 34,600 level and then shoot for the resistance range between 35,350 and 35,500. That latter range hearkens back to March and April of 2022.

More significantly, the Dow finds itself trading within a symmetrical triangle formation. This pattern began its descending trendline on June 16 at a high of 34,588. The ascending bottom trendline began at the low of 33,610 on June 26. This pattern is neutral, and only a breakout in either direction will tell us which way the wind blows. A breakout in either direction has a price target equal to the distance between the high and low of the pattern’s beginning from the breakout point. The difference in this case is 978 points, and if we add that to a breakout estimate of 34,400, we get an expected price target of 35,378. On the downside, we get an expected bearish price target of 32,722.

Though the index could breakout in either directions, to be clear, the Moving Average Convergence Divergence (MACD) indicator has crossed over negatively at the end of last week.

Medium to longer-term support exists from 32,600 to 32,800 and from 31,430 to 31,805. 

DJIA daily chart

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