The current stock trading environment has sent Dow Jones industrial Average (DJIA) in a real tussle. The index consists of 30 U.S. blue chip companies that are considered leaders in their respective domains and weighs each stock according to its market price rather than market cap. For over 100 years, this has been serving as the primary benchmark of the American stock performance.

Since all the major benchmarks are correlated, the bulls and the bears are pulling the rope in contrary directions to undermine the other. And caught in this tug-of-war is the hapless DJIA. This is especially true as the tech heavy Nasdaq Composite Index has been roaring higher with new record highs, giving an upward thrust to the DJIA (read:3 Tech-Inspired ETFs to Ride the Nasdaq Bull).

On the other hand, the Dow Jones Transportation Average, which by logic should have followed the DJIA, has been on a downtrend. According to the century-old Dow Theory, any long-lasting rally in the DJIA should be accompanied by a rally in Dow Jones Transportation Average, which doesn’t seem to be materializing at current levels. As a fallout, the DJIA is trending lower.

Notably, Nasdaq is up about 9% from a year-to-date look while Dow Transport is down over 7%. This divergent performance has led Dow Jones to add just 1.8% so far this year. The metaphor of the tug-of-war can be explained with the help of technical charts discussed below:

A Look at Technical Analysis

Here, we have taken one bullish indicator – PowerShares QQQ ETF (QQQ - ETF report) – representative of Nasdaq and a bearish indicator – iShares Dow Jones Transportation Average Fund (IYT - ETF report) – which is the Dow Transport player. DJIA is personified by SPDR Dow Jones Industrial Average ETF (DIA -ETF report), which has been stuck in a bull and bear skirmish.

From the chart below, it can be clearly noted that though DIA is trading above the short-term simple moving averages (SMA) (9-Day and 50-Day), its 9-Day SMA is still below the 50-Day SMA and 200-Day SMA, reflecting some downside. On the other hand, the price ROC, which represents the price momentum, has been on an upward slope rising 1.74% in the past few days.

As such, DIA is in neutral territory and is largely influenced by the supremacy of the bullish and bearish benchmarks (see: all the Large Cap ETFs here).

The chart for QQQ clearly signals a bull trend in the coming days. This is because the fund recently broke out its near-term range and is trading above the short-term moving average (9-Day and 50-Day). In addition, its 9-day SMA is comfortably above the 50-Day SMA and 200-Day SMA, suggesting continued bullishness for this ETF. Further, the price momentum has been higher at 1.60%, representing an upward trend in the days ahead.

On the other hand, IYT is signaling a bearish trend in the days ahead. The ETF has been on the downslide over the past few months with some respite in between. Its 9-day SMA is well below the 50-Day SMA and 200-Day SMA by substantial margins. This without a doubt reflects a huge downtrend. Further, the price momentum, as reflected by the price ROC, has been negative at 0.59%, favoring the bears (read: Will FedEx Q4 Spell More Trouble for Transport ETFs?).  

Based on these technical chart patterns, we can well deduce that QQQ is trying to pull DIA higher while IYT is dragging it in the opposite direction. This has inevitably drawn investors’ attention bringing DIA into focus.

DIA in Focus

This is one of the largest and most popular ETFs in the large cap space with AUM of over $11.6 billion. It trades in heavy volume of more than 5.3 million shares and charges a low annual fee of 17 bps.

The fund currently holds 31 stocks in its basket with the largest allocation going to Goldman Sachs (GS) and International Business Machines (IBM) with a combined 14.1% share. Other firms account for less than 5.9% share each. However, the fund has a diverse exposure across various sectors with industrials, information technology, financials, consumer discretionary and health care receiving double-digit exposure each.

The product currently has a Zacks Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: 3 Active ETFs for a Choppy Market).

In Conclusion

The tug of war is between Nasdaq ETF on the bull side and Transport ETF on the bear side. The ETF that pulls DIA into its den will finally win this game, marking a clear pathway for either the bulls or the bears to rule the market.