As the Dow Jones Industrial Average approaches 10,000, we can be sure that the media will represent a breach of that level as further signs of economic recovery. I consider such media-hyped milestones as generally unimportant in the long-term picture. However, from a technical perspective, round numbers can act as support and resistance, since many eyes will be watching as price approaches psychologically-significant levels. As the Dow tries to move over 10,000, CNBC will be providing the play-by-play, and traders will be placing stops both above and below.
At the same time, technical traders must consider the entire landscape, and should avoid attaching too much significance to a single technical factor. When considering the Dow, I generally track the Diamonds Trust ETF (DIA). Looking at DIA, the 100.00 price level roughly corresponds to the Dow 10,000. Taking a look at the DIA one-year chart, we can see the price has been trending higher since March, and is trading above its rising trendline. Price made a new high this week, albeit on lackluster volume. The 95-96.00 area is an area to look for support, considering the rising trendline, 50 day moving average, and prior low set on 10/2. In other words, we have a bullish chart here, with volume being the primary area of concern.
Looking at the monthly chart, we can see that price will run into the 200 period moving average around 106.00, provided it moves that high. We can expect this level to provide some stiff resistance for DIA in the event it rises above 100.00. Moreover, the monthly chart is certainly not bullish. We have a V-shaped move off the lows on steadily-decreasing volume as we approach the 200 period moving average.
All things considered, as traders we can use the Dow 10,000 level as one of many technical factors to influence our trading decisions in the short term. Long-term investors, on the other hand, should be very wary of this market, whether it trades above or below significant psychological levels. I continue to see this market as highly overvalued, propped up by government dollars and momentum. At some point the underlying fundamentals will assert themselves, and the market will again see considerable downside. Last week John Paulson's Weekly Market Commentary was highly insightful. I have already re-read it several times, and plan to keep it close at hand for future reference.
