Catch These Five DJIA Trends Based on Estimates Before Anyone Else Does

When it comes to trading equity securities, particularly blue chip stocks on Wall Street, the trend will always be your friend. Of all the unofficial axioms of Wall Street, following trends is right up there with "buy low, sell high." In fact, many trend chasers are not short-sellers, which means that they wait around for downtrends to take market positions instead of the opposite, which would be to wait for oversold stocks to come down from their perches. 

Some investors dismiss trend-following strategies as being part of what is known as the "herd instinct," which is what many day traders look for when evaluating signals and patterns on technical analysis charts, but the reality of trends on Wall Street is that even the most staid investment banking firms will follow them at some point. Hedge fund managers may not admit to being trend followers, but they will never shy away from instructing their trading desk operators to look for opportunities based on momentum.

DJIA Trends and Estimates

Todays Dow Jones Industrial Average (DJI) provides excellent opportunities for trend followers and momentum traders. In case you are not familiar with the DJIA, this is a benchmark index that has been around for nearly 135 years; it started as stock average published by Charles Dow on a newsletter that would eventually grow into the Wall Street Journal, and it featured the stocks of 11 American companies considered to the market leaders of their time.

DJIA stocks would later become known as components, and the list expanded to 30. The average value of these components, which include names such as Coca-Cola, Disney, Microsoft, and Walmart, is considered to be a barometer of Wall Street. There are numerous trading strategies related to the DJIA; some investors stick to the "Dogs of the Dow," which are the top 10 performing stocks, while others prefer to invest in exchange-traded fund (ETF) securities, options, or mutual funds based on this index. Regardless of the DJIA instrument you choose to trade, forecasts and estimates can be the key to making profitable trades.

DJIA Strategies Based on Estimates

Todays Dow forecasts may not be the same as tomorrow's estimates; you can get them from established publications such as the Wall Street Journal or from recommendations made by other traders on brokerage platforms that have social media features. Here are five strategies based on forecasts:

* Bad news coming from the White House: When estimates tend to be pessimistic because of a string of bad political news, particularly as they relate to foreign policy and trade between the United States and other world powers, this is an opportunity to take short market positions on the DJIA.

* Good earnings reports from DJIA components: When three or more of the Dow's 30 companies post earnings that are above the expectations of analysts, this is a good buying opportunity. To get the most out of this simple and bullish trade, it helps to pay attention to the index as soon as the reports are issued, which is often on Tuesdays. Positive reports are often posted during the early hours of the trading session; when they are delayed until the afternoon and right around the time the closing bell rings, you can almost always count on them being negative.

* The Santa Claus Rally: Institutional investors tend to be in a good mood during the end-of-the-year holidays, and they will not be shy about increasing their positions on DJIA components as the Christmas holiday approaches. This does not always happen, so it helps to pay attention to the opinions of market analysts starting in the first week of September.

* The CBOE Volatility Index: At the Chicago Board Options Exchange, futures traders speculate on the implied volatility of the markets, and they do so by taking positions on an instrument that trades under the symbol VIX. This index measures the market prices of the options taken on the S&P 500, a benchmark index that is often considered to provide a more realistic snapshot of Wall Street than the DJIA. The rule of thumb is that when the VIX is low, the value of the DJIA will increase, thus setting off momentum and buying opportunities.

* Sector ETFs: The DJIA represents industries that range from retail to apparel and from information technology to financial services. The performance of exchange-traded funds that focus on specific sectors can give traders an idea about where the DJIA could be headed. The two most represented sectors in the DJIA as of October 2019 were financial technology and financial services; when ETFs tracking these sectors are trending upwards, this could signal a DJIA buying opportunity since it indicates that the shares of certain components are doing well on Wall Street.