Dow Jones

The Dow Jones Industrial Average is a US stock market index that tracks the performance of the 30 largest publicly listed US companies.

For those wondering how many companies are in the dow jones industrial average (the DJIA), 30 of the largest US companies is the answer. Most investors equate a rising Dow Jones to a healthy US economy and a falling Dow to a weak economy.

The companies that make up the Dow Jones index are ranked differently such that firms with higher share prices have a greater weighting than the companies with lower share prices. Each stock in the Dow Jones index contributes a unique percentage to its overall value, making it a price-weighted index. In the past, some companies have been removed from the Dow Jones index after their market capitalisation fell by a large margin. Better and growing firms replaced them.

Some analysts and investors have criticised the Dow’s calculation based on stock price instead of a company’s market capitalisation. Therefore, companies with lower stock prices but higher valuations might have a lower weighting than corporations with higher stock prices but lower market capitalisation. As a result, many argue that the Dow should be calculated based on each company’s valuation.

Dow Jones chart analysis refers to the in-depth examination of the index’s price movements over time. Dow Jones technical analysis aims to identify trade opportunities that offer a good balance between the potential losses and gains.

Some of the indicators used to analyse the Dow Jones chart include the 200 DMA (daily moving average), which tracks whether the index is in an uptrend or downtrend.

The moving average indicator works by adding the closing prices of the index over a set period, such as the past 200 days and dividing the total by the number of days. For example, the 20-day and 50-day daily moving averages usually identify short-term trends that play out over weeks.

Long-term traders typically use the 100-day and 200-day moving averages to make investment decisions. They make bullish trades when the Dow trades above both moving averages and take bearish positions when the index is below both MAs.

Swing traders use the 50-day and 100-day moving averages to identify bullish and bearish trade setups, whilst short-term traders use the 50-day and 20-day MAs to identify trade setups aligned with their trading style.

An alternative to buying or selling when the price is above or below both moving averages is to trade when one moving average crosses the other.

The strategy works when one of the moving average lines crosses above the other. For example, for a bullish trend, the short-term MA line such as the 20-day MA line should cross above the longer-term moving average such as the 50-day MA line. Such a crossover indicates that a bullish trend is about to begin.

The same principle applies to traders who use other moving averages such as the 100-day and 200-day MAs or the 50-day and 100-day MAs. The opposite applies to bearish trends signalled when the short-term moving average line crosses below the longer-term one. A bear trend is likely to begin once the 100-day MA crosses below the 200-day MA.

The green arrows show when the 100-DMA crosses the 200-DMA from below it to generate a buy signal. Whilst, red arrows show when 100-DMA moved below 200-DMA and generated a sell signal.