A recent article on the Business Insider site reported a set of Death Cross/Golden Cross signals on the Dow Jones Industrial Average ($INDU). Specifically, on November 13 the 50-day moving average crossed down through the 200-day moving average, commonly called a Death Cross. Two days later the 50-day moving average crossed back up through the 200-day moving average, commonly called a Golden Cross. I was surprised by this claim because I follow the Dow and these crossovers, and I had not observed such events.
I quickly discovered the problem. The symbol $INDU is the official Dow Jones Industrial Average, but the problem is that the data for this symbol are not adjusted for dividends, as are the data for stocks, mutual funds, and ETFs. In fact, none of data for the major market indexes ($SPX, $NDX, $NYA, $COMPQ, etc.) are adjusted for dividends, so if you want to perform technical analysis on them, it is best to use the corresponding ETF.
This chart illustrates the point. Adjusting prior data for dividends changes the price index into a total return index by incorporating dividends into the data.
Now here is a chart using $INDU data. Note the whipsaw.
Now here is a chart using the Dow Jones Industrial Average ETF (DIA). The whipsaw never happens.
While the data for major market indexes is not adjusted (probably to avoid confusion regarding historical references), there are data sets other than ETFs available, usually called total return indexes. For example, symbol for the total return index for the Dow is $DJITR. Personally, I prefer the ETF.
Conclusion: When performing technical analysis, be sure that the data is adjusted for distributions (dividends and splits). Charting services like StockCharts.com perform the calculations as a matter of course.
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Carl Swenlin is a veteran technical analyst who has been actively engaged in market analysis since 1981. A pioneer in the creation of online technical resources, he was president and founder of DecisionPoint.com, one of the premier market timing and technical analysis websites on the web. DecisionPoint specializes in stock market indicators and charting. Since DecisionPoint merged with StockCharts.com in 2013, Carl has served a consulting technical analyst and blog contributor.
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