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Overbought Dow hits major resistance

The Dow Jones Industrial Average halted its run of five straight days of gains, even as US retail sales rose above expectations with nominal control group sales growing by 0.8%. The stellar run in the Dow had been boosted by earnings results from both Walmart and Home Depot, two components who are seen as key bellwethers for the health of the US consumer.

Those retail behemoths showed that consumer spending could remain strong enough to keep the economy from tipping over into a downturn and potential recession. Walmart, the world’s largest brick-and-mortar retailer, reported stronger-than-expected quarterly figures and raised its full-year guidance. The company had only recently in late July issued it second profit warnings in ten weeks. Indeed, the stock experienced its biggest one-drop drop since 1987 after it cut guidance in May.

DIY retail giant Home Depot also released its second quarter results this week and reported its best ever quarterly earnings and sales.  This was a big positive surprise for many who are seeing a slowdown in the housing market, although consumers are seemingly continuing to spend on home improvements despite rising prices and cost pressures.

Technicals now extended

The other main indices on Wall Street, namely the S&P500 and the Nasdaq, have moved into bull market territory after surging more than 20% from their lows. The Dow has yet to do this, but it did move up above its 200-day simple moving average at 33,880 on Tuesday. This comes after the industrial average paused around its 100-day simple moving average, currently at 32,639, at the end of July and beginning of this month. That was textbook bullish consolidation as prices paused for breath after its solid move higher from the June lows below 30,000.

Dow jones

If the index rises above the 200-day and closes there for an extended period of time, this should be seen as bullish pointing to further gains. To recap, the 200-day is essentially the average of the last 200 closing prices of the index and is viewed as a momentum indicator. That said, some inevitable profit taking is often taken around such levels. The RSI is also overbought which often means markets will pull back to ease these conditions. That doesn’t necessarily mean we can’t push higher with bulls eyeing up a close above the major Fib level (61.8%) of the January to June move at 34,163.

dow jones 2


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