Dow Jones Industrial Average: Market situation

The Dow Jones Industrial Average (DJIA), often referred to as the Dow, is one of the most well-known stock market indices in the world. It serves as a barometer of the overall health and performance of the U.S. stock market. This article provides an in-depth exploration of the Dow Jones Industrial Average, tracing its history, methodology, and significance in financial markets.

Historical Background:

The Dow Jones Industrial Average was created in 1896 by Charles Dow, a co-founder of Dow Jones & Company, along with his business partner Edward Jones. Initially, the index consisted of just 12 industrial companies, mainly in the railroad and manufacturing sectors. Its purpose was to provide investors with a snapshot of the stock market’s performance. The index was initially composed of 12 companies, including prominent names such as General Electric, American Cotton Oil, and American Sugar.

Methodology and Composition:

The DJIA is a price-weighted index, meaning that its value is determined by the share prices of its constituent companies, rather than their market capitalizations. The index comprises 30 large, publicly-traded companies that are leaders in their respective industries. The selection of these companies is subjective and made by the editors of The Wall Street Journal, with the goal of representing a broad range of sectors.

Significance and Market Impact:

The Dow Jones Industrial Average holds significant influence over investor sentiment and market trends. It is widely regarded as a key indicator of the overall health of the U.S. economy. Movements in the Dow are closely watched by market participants, policymakers, and the media as a gauge of market stability or volatility. Major milestones, such as reaching all-time highs or experiencing sharp declines, often garner extensive media coverage and can impact investor confidence.

Criticism and Limitations:

While the Dow Jones Industrial Average is highly regarded, it is not without criticism. One primary critique is its price-weighted methodology, which does not account for the varying market capitalizations of its component companies. Additionally, the Dow’s composition of just 30 companies may not fully represent the broader market, as other indices, such as the S&P 500, include a more extensive range of companies.

Expanding the Index, the history:

Over time, the Dow Jones Industrial Average expanded to include more companies to better represent the evolving industrial landscape. In 1916, the index expanded to 20 companies, and by 1928, it reached its current composition of 30 companies.

Market Crashes and Recoveries:

The Dow Jones Industrial Average has witnessed several significant market crashes and subsequent recoveries throughout its history. One of the most notable events was the Wall Street Crash of 1929, which marked the beginning of the Great Depression. During this period, the Dow experienced a severe decline, ultimately bottoming out in 1932. However, the index gradually recovered over the following years, reflecting the resilience of the U.S. economy.

Modern Era:

In the modern era, the Dow Jones Industrial Average has continued to serve as a key indicator of the stock market’s performance. It has experienced substantial growth and reached significant milestones. Notably, the Dow surpassed the 1,000-point mark in 1972, the 10,000-point mark in 1999, and the 20,000-point mark in 2017. Each milestone reflects the overall strength and growth of the U.S. stock market.

The chart:

Taking a look at the last few years, we see the big drop from COVID-19 and its subsequent big recovery. It is in an area of great current resistance.

Being already July 2023, I can’t stop thinking about what his next move could be…

DJI technical analysis:

In the long term, the price could even continue to rise before a correction, but it should not be ruled out that since the end of 2022 and so far in 2023, it is making descending maximums in resistance. The historical highs (ATH) reached at the beginning of 2022, could be, during a good season.

In the short term, areas of 34,500 USD seem difficult to overcome and the price could go down to look for more guaranteed support, perhaps to areas of 30,000 USD, or close to it.

Remember that price structures are built based on support and resistance, and that there are areas that must often be tested for movement continuation. I am attaching one of the visions about the DJI that I have in my eyes, and about it, what could happen. The search for areas of 30,000 USD to test this important support.

As always, the investment decision is personal. Good luck with your decisions, and happy week everyone.

Jesús Sánchez-Bermejo