Traders are always looking for relative out/under-performance among instruments in the same asset classes. Some of the best traders I know like to buy strength and sell weakness until it looks to be too much of a press in either direction. While I am not one of the “best traders that I know” I have been around the block a few times and while I like to ride a trend, I also like to look for inflection points where something weak may have bottomed or vice versa, even for a short term trade. The Dow Jones Industrial Average (INDU) might have reached just a point for a near term trade back towards support.
The one year chart below shows this mornings test of the very important technical support that is its 200 day moving average (yellow line), which for now it has held.
The INDU has show realtive under-performance since making new highs in late Sept, down about 5.5% vs the SPX down ~4%, RTY (Russell 2000) and the Nasdaq down ~3.4%.
I have no idea how this government shutdown/debt ceiling debate settles, but as I said yesterday in the MorningWord:
from an intermediate trading perspective the set up is fairly treacherous. Some sort of joint compromise to government shutdown and the debt ceiling could have the index right back up to previous highs, while a continuation of the rhetoric could likely see a bit of a crescendo into next week’s first real deadline on the ceiling. Your guess is as good as mine how this thing plays out, but one thing is for sure, the increased volatility in single names as we head into earnings season is very likely to result in trading opportunities.
In the meantime though I would possibly be inclined to play the DIA (etf on the INDU) for a bounce possibly to its 50 day moving avg just below $52 and the SPY (etf on SPX) to test its 200 day around 160. There are ways to get both right and legging into a pair could be the way to go.
The 1 year chart below of the SPX shows the breakdown below its 50 day moving avg, and the current pause at obvious support around 1650, but further weakness regarding the crap in DC could cause the SPX to a fall a tad harder than the INDU. I would be targeting 1600 in the SPX, or 160 in the SPY as the next real important support level which also corresponds with its 200 day moving average, a level it has not breached in 11 months.
Stay Tuned, looking for ways to play.