8,000 support still intact. The DJIA breached the 8,000pt psychological level last week, hitting a low of 7,845pts on Thursday before rebounding 5.5% to close the week at 8,280pts. This surprised us as we had expected the 8,000 support to succumb and minor wave (iii) to start.
Wave (ii) still in progress. The bounceback means that the minor wave (ii) rebound is still in progress. We are looking at a target of 8,500-8,800 before the next wave (iii) down leg begins.
Wrong if DJIA smashes 9,100pts. We would only be wrong about the wave (ii) rebound continuing if the DJIA topped 9,100 in the coming weeks as that would mean that the more bullish alternative wave count is in play. At the current juncture, we consider the alternative wave count to be a low-probability scenario.
Price-based index headed by IBM. Unlike most equity indices which are market cap weighted, the DJIA is a price-based index made up of 30 stocks. The top 10 account for 60% of the DJIA’s weighting or 4,770pts and the largest stock is currently IBM with a 9.3% weighting. Three financials, i.e. JP Morgan, Citigroup and Bank of America only chip in a combined 256pts or just 3.2%. Each US$1 decline in any of the DJIA stocks would shave 7.96pts from the DJIA.
Leaders show signs of breakout. The three largest DJIA stocks, IBM, Exxon and Chevron are showing signs of taking out their resistance trend lines. The next seven largest stocks, i.e. Johnson & Johnson, McDonalds, Procter & Gamble, 3M, United Technologies, Wal-Mart and Coca-Cola are currently trading below their respective 50-day SMA and resistance trend lines.
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