US Stock markets today - Dow stocks - Top 10 by weight

There’s only 2 months and a few days until the election, so if we’re going to get an election rally now would be the time to do it.

Supporting the possibility of a rally, we started to see some rising volume in a few stocks on Thursday and Friday. We also got new all-time highs in the Dow on both Thursday and Friday.

Bottom line: we’re looking for signs of strength and weakness in the Dow stocks to determine if the Dow index is poised for a rally.

Before examining the stocks, we wanted to see if it was even reasonable to expect a rally into the election.

To answer this question we did some research on the 4-year election cycle and discovered that year 3 is actually the best year for stock returns. Another surprise was finding that the technology sector tends to be weak in year 4.

The possibility of weakness in the tech sector is particularly interesting at this time because it is the Magnificent 7 stocks and the AI stocks that are currently driving the markets higher. Or, perhaps, it is more appropriate to say that these stocks had been driving the markets higher until recently.

It makes some sense that year 3 of the election cycle would be tend to be strong because the incumbent President and their party want to window dress the markets to make themselves look good in year four.

In year 4 investors are paying attention to what the candidates say about economic policy so volatility in the markets tends to increase. Current economic conditions are always the primary driver of stock market performance but in year 4, potential changes to economic policy are also important.

Dow index today – daily time frame

Focusing on Thursday's action, we see that the Dow poked up to a new all-time high but then dropped back and closed in a resistance zone. The price action left a Doji candlestick which is always indicative of elevated energy.

On Friday the elevated energy pushed the index to another all-time high and this time, the index was able to close above resistance.

We were expecting weakness on Friday because of the three-day holiday weekend. The strong close was a surprise because we suspected that traders would exit the markets due to geopolitical risks that could arise while the markets were closed.

The daily chart is bullish based on MACD, Stochastics, and the alignment of the moving averages. MACD is overbought but that is the only detractor from the otherwise bullish picture.

Dow index today – weekly and monthly time frames

The weekly chart of the Dow index, like the daily time frame, looks bullish. Energy is elevated based on the Stochastics indicator and we got a new buy signal last week based on the MACD indicator.

In the monthly time frame, we have a Bull Hammer candlestick for August which suggests elevated energy as we move into September. This candlestick has formed just below the median line of the current modified-Schiff Pitchfork.

Dow Jones components

In the remainder of the video we performed Technical analysis of the top 10 Dow Jones stocks as ordered by the stocks weighting within the index.

Out of these 10 Dow stocks, 4 are poised to make new all-time highs, while the other 6 are looking less bullish. In fact, two of the 6 stocks look downright bearish, as if they would rather head lower instead of higher.

United Health Group (UNH) is 9.38% of the Dow Jones index and it was added in 2012. The Stock is poised to make new all-time highs and volume increased on both Thursday and Friday. Based on the moving averages and the MACD indicator, UNH is very overbought.

As we were doing the research for this video, we noticed that several stocks had been added to the Dow in 2008 (the Great Financial Crisis) along with a handful of additions in 2020 (the Big Scary Plunge). After this observation we noted on each Stock chart the date it was added.

We have mentioned recently that the Dow index is managed with a bullish bias.

When a Stock market sector becomes weak the index allocation towards that sector is reduced and the allocation towards stronger sectors is increased. When a particular Dow stock becomes weak it is removed from the index and replaced with a stronger stock.

This bullish management of the Dow index parallels common advice for managing an Investment Portfolio – cut the dogs, hang on to the winners.

In other words, it makes some sense to manage an index of Stocks in this manner, but it essentially makes the index useless for performing long-term Technical analysis. This is particularly true in an index like the Dow which only contains 30 Stocks at any given time.

Goldman Sachs (GS) is 8.04% of the index and it became a Dow stock in 2013. 

GS is currently consolidating just below a triple top, and the Stock is quite overbought based on the moving averages. Bullish action in volume suggests that GS is likely to push above the triple top and move on to new all-time highs.

Microsoft (MSFT) makes up 6.5% of the index and it has been a Dow component since 1999.

MSFT looks bearish in the daily time frame, although it is currently consolidating along the 200-day moving average and volume rose bullishly on Friday.

Price action in this Stock since early July is suggestive of an overall downtrend. This view is supported by the corresponding volume during this period as well as the MACD indicator being in Bear mode.

Given the overall bearish setup, the rally during August looks like a counter-trend rally instead of a sustainable uptrend.

Watch the video for in-depth Technical analysis of these Dow component stocks:

Home Depot (HD) – 5.82% - 1999

Caterpillar (CAT) - 5.58% - 1991

Amgen (AMGN) – 5.25% - 2020

McDonalds (MCD) – 4.56% - 1985

Visa (V) - 4.35% - 2013

American Express (AXP) – 4.12% - 1982

Salesforce (CRM) – 4.07% - 2020

Wrapping up

Based on the charts of the Dow index and four of the Dow stocks, it would be reasonable to expect higher prices as we move into September and closer to the election.

Supporting this outlook is the two new all-time highs the Dow index made on Thursday and Friday and the fact that these ATHs occurred on rising volume.