Identifying important levels on the markets can be quite a tricky task. First of all, which index do you look at? Next, what time frame is analyzed? Etc. Since technical analysis is somewhat objective, I really don’t think there is necessarily a right or wrong answer to these questions. However, from time to time some key levels are quite clear, at least to me.
A lot of people have a tendency to hone in on round numbers such as 11,000 or 1200. For example, I’ve heard 12,000 on the Dow being referenced quite often lately. I would certainly agree that these price points are usually important, but there are definitely other prices that can be important. Please review the chart of the Dow below:
You will notice the level I’ve highlighted around 11,750. The all time high at the forefront of the Dot.com bust was 11,750. This same level was resisted the next time up in 2006. That same 11,750 became support briefly on the way down in 2008. So, is it really a coincidence that that Dow stalled just over 11,700 yesterday? Add this to the Nasdaq hitting 2700 and Russell stalling at 800 and you have yourself an interesting potential stopping point for the markets.
The Tale of the Tape: 12,000 on the Dow may not be a foregone conclusion. 11,750 has proven itself to be important throughout the last decade. Combine this level (which is close to where the Dow stalled yesterday) with a market that is definitely “due” for a pullback and the stage could be set for some trouble. Use your stops and protect yourself from a potential reversal. Be on the lookout for short trade setups if they present themselves.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT