13,000 and Closing!

March 5, 2012, 1:31 pm Aaron Lynch Yahoo!7

They say on Wall Street that numbers and milestones are important until they are not. And so it is for the mystical 13,000-point level.

The U.S. market has rallied further in terms of price and position than the local market. In fact, many traders I know (including clients) have found the U.S. market “the land of opportunity” while Australia remains “the land of volatility and sideways moves”.

Many pundits lauded the fact the Dow Jones closed at 13,005 points last week but this advance was summarily put to the sword as the market ducked back under this ‘magical’ level. So what does it all mean?

It’s a case of what are called support and resistance levels. These levels are created for technical reasons, fundamental reasons or irrational reasons. I call them the ‘because’ levels - because if enough participants in markets think they are important, they become so. The chart below covers the Dow Jones index over the last five-years or so and I have marked the levels in multiples of one thousand equally from 6,000 to 15,000 points.

Weekly Bar Chart - Dow Jones

You can see that in many cases the market has acted as a cushion of support or ceiling of resistance around these 1,000 point multiples. In all these cases there is no magic number or exact outcome, which means we can use these levels as an idea of what lies ahead but only in the context of a defined plan.

My view is that the 13,000 level may act as resistance in the near term as it creates a double top with the May, 2008 top. Further, this market has been very strong in 2012 and may need a rest - in terms of a pullback - to force the bulls to go long again when they see value in the dips.

If there is no pullback and the Dow surges higher, a legitimate long strategy would be to wait for confirmation that the 13,000 level is ‘supported’ and then look to open long positions based on your plan. If this turns out to be a spectacular new bull market, then waiting for confirmation will mean there is still plenty of upside, even for those who wait. As far as I’m concerned, it is always better to be right than first.

Good Trading

Aaron is a regular contributor to Trading Tutors newsletter and blog, a resource for all active traders.

More from Aaron Lynch:
Downside Risk - Measuring Trends
Europe Is Resolved? Buy The Rumour Sell The Fact?
Who's For The Heavy Lifting?

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