The market pullback this week has sent the Dow Jones Industrial Average and index-related exchange traded fund below their long-term trend lines, but some may see the weakness as a potentially cheap entry point.
The SDPR Dow Jones Industrial Average ETF (NYSEArca: DIA) fell 1.7% over the past week and and dipped 0.9% year-to-date. DIA is now trading 1.7% below its 200-day simple moving average.
The Dow has dipped back-to-back over the past six days, and the charts show that the index’s short-term 50-day moving average is falling toward its long-term trend line, a convergence that has not happened since January 2012, reports Joseph Ciolli for Bloomberg.
The crossover of the long-term moving average breaking above its short-term moving average, or a so-called Death Cross, is taken by technical analysts as a breakdown in momentum and a relatively bearish signal.
“When you’re in a short-term trading range, that’s going to flatten out the moving averages,” Frank Cappelleri, a market technician at Instinet LLC, told Bloomberg. “And since you’ve been in an uptrend for a number of years leading up to that, the 200-day will continue to rise. Because of how they’re constructed, this was inevitable.”
The Dow has been pummeled by a recent spate of poor earnings, notably from declining Technology shares like International Business Machines (NYSE: IBM), Apple (NasadaqGS: AAPL) and Microsoft (NasdaqGS: MSFT). Walt Disney (NYSE: DIS) also plunged earlier this week after revealing a fundamental shift in the media industry toward online streaming. DIA includes a 6.0% position in IBM, 4.4% in AAPL, 4.4% in DIS and 1.8% in MSFT.
While the converging short- and long-term trends in the Dow are worrisome, Cappelleri also argues that it could signal a bottom for the index and represent a potential buying opportunity.
“It’s going to be pretty sufficiently oversold at the point of a death cross,” Cappelleri said. “A lot of times when you see one, it happens towards the end of a short-term move, so you could get whipsawed.”
Consequently, more aggressive traders who believe in a rebound on the low levels can utilize leveraged ETF options to capture a potential bounce. For instance, the ProShares Ultra Dow30 (NYSEArca: DDM) takes the 2x or 200% daily performance of the Dow, and the ProShares UltraPro Dow30 (NYSEArca: UDOW) takes the 3x or 300% daily performance of the Dow.
SDPR Dow Jones Industrial Average ETF
For more information on the Dow, visit our Dow Jones Industrial Average category.
Max Chen contributed to this article.