Support And Resistance Levels On The Dow

| February 15, 2008 | 0 Comments

I had the opportunity to meet with a very interesting investor recently. He works at a hedge fund putting to work more than $150 million. His focus . . . distressed debt.  Sensing an opportunity, I started questioning him about his investments and how he’s making money in this market. His response was surprising.

“We haven’t deployed capital in more than 18 months.”

What?  I asked him to repeat his answer; I couldn’t believe what I had heard.  “We haven’t deployed capital in more than 18 months.”  Despite all of the market turmoil and the near collapse of the real estate and mortgage industries, he was sitting 100% in cash (and being paid well to do it).

His explanation was simple.  “We expect another leg-down in the markets.”  I was floored by this answer.  We have fallen about 2,000 points on the Dow, almost 15%.  Yet, he expects the markets to fall further.  He wouldn’t say much more, but a warning like that is very hard to ignore.

I’m hoping he’s wrong.  But, what if he isn’t?

As a result, I started looking more closely at my charts.   With technical analysis, one of the first indicators you learn about is support and resistance.   Support lines are points on the chart where buying interest is strong enough to overcome selling pressure.   The Dow clearly has a support line around the 12,000 level (I’ve put it on the chart below in blue).

On January 22, the Dow Jones industrial Average closed at 11,971, the first time below 12,000 since the third quarter of 2006 (point A).   In March of 2007, we were close to the support line again but never broke below it (point B).

So obviously, 12,000 is a very important level.   If we close below this level for more than 2 days in a row, I would argue that we are headed even lower.  It suggests a bear market trend with more sellers than buyers.  In my opinion, a move below 12,000 confirms recession-fears and indicates the market will fall further, possibly as low as 11,700 (the next point of support).

I’m going to watch these levels very closely – as should you.

If we break below these levels, I would suggest moving part of your portfolio into recession proof investments.  The healthcare industry is a good place to start.  In the last recession from 2000 to 2002, the Dow Jones US Health Care Providers Index rallied more than 100%.

Some healthcare focused ETFs include the iShares Dow Jones US Healthcare (IYH), or iShares Dow Jones US Healthcare Provider (IHF).  Both might provide good cover in a falling market.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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