DJIA - DJIA: Further Upside Is Likely (Technical Analysis)

Summary

• The recent 22% decline in the Dow Jones Industrial Average Index did not damage the strong uptrend.
• A break above $35,500 in DJI will open the doors for increased prices in the index.
• Global X Dow 30 Covered Call ETF has a strong correlation with DJI, and any breakout to the upside will spark a significant ETF rally.

The Dow Jones Industrial Average ( DJI ) is a stock market index that measures the performance of 30 large, publicly traded U.S. companies. The index is widely regarded as a leading indicator of the US stock market's overall health. Investing in the DJI provides investors with broad exposure to the U.S. economy, as its constituent companies are typically well-established and industry leaders. Since its inception, the DJI has been ascending in a parabolic fashion. The majority of the parabolic move began after 1990, and corrections are viewed as opportunities for investors to gain exposure in the stock market. The recent uptrend began in 2009 from $6,469 lows and gained more than 450% in 12 years; however, the 22% decline in 2022 did not damage the recent uptrend. The price is once again poised to increase. Global X Dow 30 Covered Call ETF ( DJIA ) is a covered call ETF designed to track DJI's performance. Consequently, the DJIA ETF has a strong correlation with DJI. A high correlation between two instruments indicates that their returns tend to move in the same direction, so if the DJI rises, the ETF will also increase in value. The DJIA ETF is an excellent investment option due to its consistent income generation, reduced volatility, and diversification. ETFs generate income through the sale of call options, which provide a steady income stream during periods of sluggish stock market performance.

This article discusses the current state of DJI and DJIA ETF in light of price action analysis. Currently, the DJI is exhibiting bullish price action, and January 2023 was an inside bar. Any breach above the previous month's high will trigger the DJI rally. Due to a strong correlation, DJIA ETF will follow DJI's price movement.

DJI Remain In A Strong Uptrend

The DJI outlook can be seen in the following monthly chart. As the price is trading above the 50-month moving average, the chart depicts a strong bullish trend. As seen in the chart below, the 50-month moving average has been a strong buying opportunity. Price has recently rebounded from the lows of October 2022 and developed an inside bar as the price of January 2023 traded between the highs and lows of December 2022. A break of inside bars' highs or lows indicates a significant market move. However, the price above 50 moving averages increases the likelihood of an upside breakout.

In addition, the price is trading above the blue support line, which is another bullish sign. As long as the price remains above the blue trend line, it is anticipated that the DJI will rise. The chart below presents ascending broadening the wedge with the price trading higher. The formation of the ascending broadening wedge is a result of the price movement's increased volatility. When the DJI price reached the intersection of the support line and ascending broadening wedge in March 2020, a strong buy signal was generated. Moreover, the January 2023 inside bar indicates price compression within the uptrend and the continuation of bullish momentum.

The recent evolution of the DJI can be observed using the DJI weekly chart. The price structure is forming an inverted head and shoulders with $35,500 serving as the neckline. Consequently, any breakout from the neckline will activate the inverted head and shoulders pattern and target significantly higher prices. RSI readings above 50 indicate that a breakout is likely.

Market Risk

The current environment is characterized by higher inflation and high-interest rates. A higher interest rate environment increases stock market risk because borrowing costs are higher. Since inflation remains elevated, the Federal Reserve will likely increase interest rates further, thereby increasing market risk. A further market risk is the formation of an ascending broadening wedge, which is typically a bearish pattern. A decline below $20,000 will be a bearish signal toward $9,000. A move below the lows of December 2022 will trigger the inside bar to the downside and open the door to lower prices.

The correlation between the DJIA ETF and DJI may not always be perfect, as the ETF is influenced by additional factors such as the income generated from the sale of covered call options, the management fees associated with the ETF, and market conditions. Consequently, the higher price in DJI may not always carry over to DJIA ETF. Therefore, investors must consider the associated risk within the market before investing in the ETF.

Conclusion

Based on the above discussion, DJI is emerging a bullish price structure and forms inside bar. Any move above the January 2023 highs will initiate a huge rally to the upside. On the other, DJIA ETF is also emerging with an inverted head and shoulder same as DJI. The upside breakout in the DJI will likely benefit the price of DJIA, whereby ETF looks to be the better investment option based on investors' personal financial goals, risk tolerance, investment time horizon, and other individual factors. Due to the possibility of a recession in 2023 due to high-interest rates, buying DJIA is a good option to gain a steady income.

In conclusion, DJIA looks to be very attractive in 2023 based on the upcoming recession risk. Therefore, any pullback in the DJIA ETF is considered as a buying opportunity for investors.

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