The Dow Jones Australia Index was launched in January 2000, just as the ASX was in the throes of reorganising the All Ordinaries Index. It was designed from the first to serve as a benchmark of Australian stocks, in direct competition to the AOI, as well as a tradable and investable product.

Rather than including a fixed number of stocks, as the S&P/ASX 200 and many other indices do, the DJAU index instead is designed to cover 95% of the total Australian stock exchange. Certain equities are excluded from consideration, including those that are illiquid, have been offerred for less than six months, are foreign issues, owned to a large extent by one entity, and investment trusts.

The DJAU index can be broken into three sub-indices: the large cap, representing the upper 70% of Australia’s market value; the mid cap, which includes the next 20%; and the small cap, which includes 50% of the remaining market value, excluding the least traded stocks to prevent issues with liquidity.

The DJAU index also utilises the Dow Jones global industrial classification system, with 10 market sectors, 40 industrial groupings, and 70 sub-groupings. These sub-indices and industrial classifications allow investors to track the performance of various sectors of the Australian stock exchange individually.

In March 2003, the DJAU index initiated a bullish run that lasted for five years, and which saw the index climb from 183.86 to an all-time high at 467.07, reached 1 November 2007.

At the onset of the global financial crisis in the autumn of 2007, the DJAU index began falling from those highs above 450. It fell to 350, bounced back as high as 400 and even slightly above it in May 2008, then consolidated between those support and resistance levels until early July, at which point it sank through support at 350 and turned it to resistance, as illustrated by the daily chart below:

Note that this is now a well-respected and strong resistance level, with clear historical backing. In future, this could be a difficult level to clear, and as the price action again closes in on this level, another analysis will be necessary.

Drawing a trendline along the reaction lows, initiating 16 August 2007 at 385.90, shows the price action breaking below the downtrend during the post-Lehman panic, and not resuming above that line until June 2009, as shown on the chart below:

Another way of looking at the chart shows that a bullish trendline can be drawn off the 5 March 2009 low of 210.29, respected on 13 July at 251.31. This more recent analysis shows the price action currently well above the uptrend, with sufficient room to retract should investor confidence in the global recovery falter:

In summary, it is in a current uptrend with room to fall back down and follow the uptrend line. It is making its way up to a strong historical resistance level, where a new analysis will need to be performed at that time. Unless a major reversal occurs, however, the trend remains bullish.

technical analysis by Craig Liles

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