It doesn’t happen often, but when it does; it’s kind of a big deal – changes to the Dow Jones (NYSEArca: DIA).

Those changes, however, are becoming more frequent. On September 22, 2009, Kraft Foods (NYSE: KFT) replaced American International Group (NYSE: AIG).

Ever since then, the Dow has been underweighted in financials. The reduced financial exposure explains why the Dow has performaned better than the S&P 500 (NYSEArca: SPY), over the past year or so. The Financial Select Sector SPDRs (NYSEArca: XLF) were the worst performing sector, up until the rally from the March lows.

On March 2nd, the ETF Profit Strategy Newsletter recommended to sell the previously acquired short ETFs and buy long ETFs, in particular financial related ETFs such as the Ultra Financial ProShares (NYSEArca: UYG).

As financials have seemingly recovered (more about that later), General Motors was forced to file for bankruptcy. This did not fase investors, as the Dow rallied over 220 points on economic news which was perceived to be positive.

Effective as of June 8th, Travelers (NYSE: TRV) will replace Citigroup (NYSE: C), while Cisco (Nasdaq: CSCO) will replace General Motors.

How new components are selected:

Composition changes are rare and generally occur following corporate acquisitions, or other dramatic shifts in a company’s core business. When such an event necessitates that one component be replaced, the entire average is reviewed. The increased frequency of recent changes reflects the shift in economic momentum. Even blue chip stocks are far from recession resistant.

Constituents, or replacements, are selected by the editors of The Wall Street Journal. A stock typically is added only if the company is widely known, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents a market sector covered by the average.

Even though new to the Dow Jones, Cisco has been part of many other indexes/ETFs for years. The Nasdaq (NYSEArca: QQQQ), Technology Select Sector SPDRs (NYSEArca: XLK), and Russell 1000 Growth (NYSEArca: IWF) are just a few examples.

Travelers is actually a former unit of Citigroup. We are all familiar with Citigroup’s recent history.

Will the “new Dow” break through the 200-day moving average?

With yesterday’s 2.60% gain, the Dow Jones has pushed up right against the 200-day moving average (MA). Many regard the 200-day MA as a powerful indicator. A break above the 200-day MA) is often viewed as a major shift in momentum, indicative of higher prices ahead. Will the Dow take out the MA resistance level?

The ETF Profit Strategy Newsletter expects the Dow to break through the 200-day MA. In fact, already in 2008, the newsletter forecasted new lows to be reached in Q1/Q2 of 2009 followed by the biggest rally since the 2007 highs. In February 2009, the range for a bottom was narrowed down to Dow 6,700 – 6,000, followed by a 30-40% rally.

How accurate is the 200-day moving average?

The Dow broke below the 200-day MA average around 13,000. Heeding the MA warning could have prevented a lot of losses. In a one-directional market, the 200-day MA works well. Once the stock market kisses the MA good bye, the MA will not be revisited unless a new trend is well underway.

We’ve seen this happen in the bull market of the late 90s where the market was one-directional (up), and in the bear markets starting in 2000 and 2007. The last up-signal received via the 200-day MA ,however, was a false alarm. The up-signal we may receive in the next few days/weeks comes after a mature 35% rally. Would you want to jump into the market after it's rallied 35% in less than three months?

Savvy investors always try to draw lessons from history. The only other bear market that has been equal to the current one, and could serve as a parallel, is the Great Depression. From the 1929 highs to the 1932 lows, the Dow Jones lost nearly 90%. In between that waterfall decline, spanning four years from top to bottom, there were five rallies ranging from 24% to 48%. What does that remind you of? Déjà vu.

The mother of all questions

The key question is not whether the Dow will break through the 200-day MA. The key question is: Where is the ultimate low? As long as the stock market continues to proceed from lower highs to lower lows, the 200-day, or any other moving average, is of little use.

Just as a skilled artist uses a variety of brushes, techniques, and color tones to produce a fine piece of art; experienced investors rely on a combination of indicators and signals. No single  indicator is infallible.

By using a composite of indicators, however, it is possible to discern the short, mid, and long-term direction with a high level of certainty.

The ETF Profit Strategy Newsletter draws from a wide range of indicators, some simple and some sophisticated, to put the market’s action in context. Similar to a puzzle where you frame all the border pieces first, long-term indicators are used to build the foundation – a long term forecast.

Once that is in place, mid and short-term indicators are used to fill in the “center of the puzzle.” This approach resulted in calling a market top above Dow 9,000 in January 2009, and a market bottom below Dow 6,700 in March 2009.

Based on the “big-picture” long-term indicator, the upcoming 200-day MA buy-signal will be another false alarm. Moving indicators are lagging indicators. As such, the sell signal will come after the decline has started, while the next buy signal will likely be another 30% late. Can your portfolio afford inaccuracies of that sort?