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Charting the Dow

Posted by Larry Doyle on May 20, 2010 2:44 PM |

While financial media and the financial industry tend to focus on the day to day, I believe we are far better served to look at the big picture and chart the major market averages over a longer time frame. To that end, what does a 3 year chart of the Dow tell us? Let’s navigate.

The Dow topped out at slightly over the 14000 level in the 4th quarter of 2007. We bottomed at approximately 6600 in March 2009. The Dow moved to a recent high of approximately 11,300 and is now trading at 10,200.

What do these numbers represent?

Technical levels promoted by those who track Fibonacci retracements. As our friendly Investing primer points out, Fibonacci numbers are determined as:

These levels are created by drawing a trendline between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

The 11,300 level was a .618% retracement of the entire downward move. Our current level of 10,200 represents just slightly below a 50% retracement.

If we were to continue to move lower, the next support would be in the 9400 range. Why do I track these levels? When volume drops, which it has, trading is often dominated by technicians. What do technicians do? They push markets to key support and resistance levels often dictated by these Fibonacci levels. In the process, the technicians see if the moves can trigger more activity and momentum which they can then ride.

I also view Fibonacci levels as indications where investors are often trapped. How so? They have gotten long from above the current market levels and/or short from below the current market levels. What does that mean? Nobody is happy. Sound like today’s market environment? I thought so.

LD






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