I only ask this question because I don’t really have a clean answer. This is a similar conundrum to the dividend-adjusted chart question. Over the years I’ve asked a lot of the best technicians I know how they feel about this stuff. I usually get mixed answers, but true price generally wins the argument. It doesn’t mean that it’s right or wrong, but it’s the answer that I get most from my friends and the one that makes most sense to me as a technician.
Today we’re looking at an inflation-adjusted chart of the Dow Jones Industrial Average. As you can see below, prices are approaching the January 2000 and October 2007 highs, but still have not exceeded them. Now, as technicians, should we view this as resistance? That’s the question I’m asking:
The best argument I’ve heard against using inflation-adjusted charts for support and resistance (and dividend-adjusted as well for that matter) is that only pure price pays. In other words, the reason that support and resistance works is because as market participants, if we bought something at 40, whether dividend or inflation-adjusted, we bought it at 40. So if it sells off and goes to, say 30, and then gets back to 40, we are whole once again. Where there were formerly sellers at 40, anyone who bought up there can now sell it at breakeven.
Same thing in that example if prices head back to 40. Any short sellers that shorted xyz at 30, are now even again. Anyone who wanted to buy at 30 and didn’t, now has another chance. Anyone who covered their shorts at 30 and re-shorted it at 40 can now cover at 30 once again. In this example, it’s the price we remember. To me, that’s what matters: where we bought it and where we sold it, regardless of whether dividends were issued or not.
Still, I ask the question. Should resistance up here on the dividend adjusted chart of the Dow matter to us? In general, forget this chart, should it matter?
Tags: $DJIA $DIA $YM_F