Since October 23rd, the Dow Jones Industrial Average has been a place where we’ve wanted to stay away. This was the day that it first crossed above what was then, and still is, a flat 200 day simple moving average. When prices are anywhere near a flat 200 day, we want nothing to do with it. For almost 2 months now, this index has been stuck in a tight, yet volatile range, frustrating both the bulls and the bears along the way. But after the dust has settled, prices are exactly where they started on October 23rd. To me, it’s the perfect example of why we avoid these sort of situations. Who needs that headache?
The problem that I see moving forward is the uptrend line from the August lows. This trendline has now been tested 3 times and if it fails to hold, it would present a huge problem for the popular large-cap index. This 17,150 level is important as it goes back to former support levels in December of last year and again in February.
The consequences of a break of this support should be felt for some time. First of all, it would invalidate any of the constructive behavior we saw throughout September and October. Secondly, it would put prices back below what will become future overhead supply. And worst of all, it would allow the 200 day moving average to begin to slope lower. Remember we don’t use this smoothing mechanism for support and resistance purposes; we use it to help with trend recognition. When prices are below a downward sloping 200 day moving average, it’s not in an uptrend, I promise.
This 17,150 level is a big one. We will maintain the same neutral approach towards this index that we’ve had for 2 months as long as prices remain above that. But if we break, this is going to present a much bigger problem for investors. At best, it would lead to even more time necessary before any kind of upside resolution and new leg higher for this market to develop. Let’s just say, the market is already a mess but it will turn into a disaster if this level breaks.
Tags: $DJIA $YM_F $DIA