Dow Grinds Away Below Dual Round-Number Pressure

Major equity indexes face stiff psychological chart challenges as the fourth quarter winds down

by Bernie Schaeffer

Published on Nov 26, 2019 at 8:02 AM
Updated on Nov 26, 2019 at 8:02 AM

We're only a couple of weeks out from a commentary in this space dedicated to the steely significance of two "mega round" numbers for the S&P MidCap 400 Index (MID) -- namely, the 2,000 millennium level and its 20% year-to-date return. In the days since that column was published, these twin sticking points haven't wavered; after closing at 2,000.61 on Friday, Nov. 15, MID opened the next Monday with a modest decline that left it back around 1,997 by the close.

Last Tuesday's trading brought another MID closing high of 2,001.35, quickly followed by Wednesday's intraday peak of 2,005.01 -- but that bold incursion above the 2,000 barrier unraveled by the closing bell. MID finished Wednesday's session at 1,994.17, dropping its year-to-date gain back down to 19.9%. The mid-cap index ultimately wrapped up the week at 1,985.87, firmly below both 2,000 and that slippery 20% level.

And while MID's technical struggles have continued apace in recent weeks, its plight has been pretty effectively aped by the vaunted Dow Jones Industrial Average (DJI). A 20% year-to-date return for the Dow is located at 27,992.95 -- just a hair's breadth from the 28,000 region. Though the Dow has placed quite a few more millennia in its rearview over the years than has the MID, it would seem this latest five-digit hurdle is nevertheless putting up a fight before it falls to the wayside.

Just like MID and its mid-November weekly photo finish above 2K, the Dow wrapped up Friday, Nov. 15 at 28,004.89. After extending its push above 28,000 into a second and third session -- Monday brought a closing high of 28,036.22, and Tuesday an intraday best of 28,090.21 -- the wheels began to fall off the rally cart. The Dow teetered to a negative finish on Tuesday, ending the session at 27,934.02, and bringing its year-to-date gain to 19.7%. At Friday's close, the Dow was perched at 27,875.62, up 19.5% for 2019.

It may feel disappointing for the bulls to have closed, on a weekly basis, just below these big round numbers. But the silver lining is that this reduces the risk of an immediate retreat back south of these levels early in the week, as we just saw play out. And the major equity benchmarks did, in fact, successfully retreat from their most overbought extremes over the course of last week's choppy trading.

That said, some of the options indicators we follow are flashing potentially excessive optimism, and the Cboe Volatility Index (VIX) is hovering near the 12 level from which it has spiked multiple times this year. With risk still lingering ahead of the fourth quarter's final stretch, traders should remain wary of the possibility for a pullback to either of a pair of trendlines that has supported the Dow's most recent rejections from millennium-level tests: the 40-day moving average, currently around 27,135; and the 320-day trendline, just north of 25,930.

dji ytd percent change 28k

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, November 24.


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