Looks like DOW may try to test the bottom made in January.  If it breaks it......be ready for a big fall.

What makes you think this, jackg1606? Help us understand.

I believe jackg1606 is referring to the concept of "support" in the market.  Technical analysts believe that market participants use past prices in making present decisions.  In a sense, the market "remembers" that when the Dow dipped to 11,600 in late January it made a big bounce.  Therefore, market participants expect the same thing may happen again if the market drops to that level.  Many will put in buy orders at the "support" level expecting a bounce.  Similarly, many will put their stop orders just below the "support" level so they can get out if the market crashes through.  These expectations and orders therefore create a line in the sand.

If the market goes down to its previous lows and bounces up once again, this forms what is called a double bottom.  That's a very bullish signal and the market could take off from there.  Conversely, if the market falls below the "support" level it will trigger a lot of stop orders and many who bought at higher prices will throw in the towel.  This  is what is known as "capitulation" and it would likely cause a big drop, as jack suggests.

Many market veterans are waiting and watching how the market will respond if/when the market approaches the prior lows.  Many are hoping for a big drop so they can pick up the shattered pieces from the market participants who will lose hope at that stage.  This is what is meant by "buying when there is blood in the streets".

IMO it's a very interesting situation right now.  I think that *because* so many market participants expect a double bottom (or expect that we've already seen the lows for the year), this actually makes it more likely that we'll break through the prior lows.  All of this rah-rah cheering on CNBC only makes matters worse.  For now, we're stuck in a range between 1320 and 1400 on the S&P 500.  Until it breaks higher or lower, I wouldn't be making huge bets either way.  Focus on capital preservation and you'll be fine once the market shows us its hand.

Sorry for the long post, but I think it's important for market newbies to understand this concept.

Great post bnor24. Thanks.

I agree. Thanks for the post. Thorough explanations are more meaningful than one-liners.

Technically we are in a range bound market, about  1300-1400 in the S&P 500.  If we move below the support of 1300, and retest it from below (and fail), then 1300 is the new resistance.  If we move below, but for only a short time period then the support is said to have hold.  The same goes for 1400 being the current resistance.  If we go above it, then retest it from above (and holds) then 1400 is the new support.  If we break through 1400, but only for a brief time (then go back below 1400), the resistance is said to have held.

Good Luck,
Scott
S&P 500 Trend

I agree with this accessment that we will be heading lower way before we head higher.
I've been shorting the market for a few months now, waiting for the next and possibly last big down turn.

The S& P already touched it low closing bottom yesterday & had a nice bounce.  There's already been blood in the streets the first time it did so.  The mearket leaders (energy, commodity sectors) are already well above their lows.  Seems to me the bottom is in & the bull is here.  We've already had capitulation in January & selling volume has decreased significantly. 

Thanks  bn024. This is a great explanation on support and resitance. I suggest one takes a look at a year long chart of a stock and draw lines where the price ends on different days at lose to the same rate and you can see how support and resistance acts with price. Notice that when resistance is broken it then becomes a support line. The more times resistance has failed before the bigger the uptrend after it breaks it. This line then becomes support. Today will be a really big day in depending where the market will go from here. If we bounce off the Jan lows, with decent volume we may be back in the race. If it fails here.....wow. watch out. There are a lot of articles on the web on Support and Resistance. just google, yahoo or mama Stock support and resistance. May all your trades be green!

pilgrim:

The S& P already touched it low closing bottom yesterday & had a nice bounce.  There's already been blood in the streets the first time it did so.  The mearket leaders (energy, commodity sectors) are already well above their lows.  Seems to me the bottom is in & the bull is here.  We've already had capitulation in January & selling volume has decreased significantly. 

Thanks pilgrim for a very nice summary of the bulls' argument.  Yesterday's successful retest of 1310 was certainly a feather in the bulls' cap.

Just for contrast I thought I would summarize the bear's argument, which I find a little more compelling (but I'm certainly willing to admit I'm wrong if the bulls can take back control).

- Technically the market is severely damaged and the path of least resistance is down.  The bulls' failing to even take back the 50 day MA on the recent rally was a major sign of weakness.

- The economic news has been (and continues to be) horrible.  While the bulls can argue the market's failure to make new lows means the bad news has all been priced in, the bulls are clearly in need of some positive economic news soon or else it's hard to see how they're going to gain any traction.

- The strength in energy & commodities is more a sign of the weakening dollar, rather than a sign of equity market strength.  Bears argue that the Fed is painting themselves into the corner with these rate cuts and inflation is going to get even worse.

- The January bottom did not represent "true" capitulation -- the fear level wasn't high enough.  The Fed's surprise rate cut saved the market temporarily, but simultaneously guaranteed that we'll have to revisit the lows because we didn't see the level of fear required to put in a more sustainable bottom.

In any case, it will certainly be interesting to see how this all plays out.  You've got to love the drama of the market ;)

11,500 is uptrend support dating to 1991.  That's where the dotcom/iraq downturn reversed itself (on that trendline, which is gradually rising and was lower then).  It will probably hold there.  If not we could spend 3 years going down. 

See long term chart and let me know what you think.  (you have to copy and paste the url manually)

stockcharts.com/c-sc/sc?s=$INDU&p=M&b=4&g=0&i=p69793707595&a=130499551&r=687

 

 

I agree with your points here, bnor, and agree that the bears have the advantage for the near and intermediate term.  There are a few keys that I'd like to expand on from your analysis too.  In reference to the DIA:

-The July-October-December Head-and-Shoulders indicates a downward resistance line into the latter part of the summer (late July, early August.  However, that downward resistance is actually part of a pennant feature with some strong support in the 11,800-12,000 area for the same period.

-When you couple the reversal trend support with the previous 2yr upchannel support, they converge right smack on the January bottom, which has at least held thusfar.  This leads me to believe that 11,800ish has some massive support to it.  A break through 11,800 by any more than 1% in the next month or so portends a fall on the magnitude of that from the 12,700 break to 12,000 in early January.  The failure to break through the 50d moving average makes this scenario even more possible as the oscillations are getting tighter and generating more momentum for a breakout.  A break through 11,800 will almost certainly take us to 11,000 in short order.

-On a longer time horizion, if we, instead, continue the rocky sideways market until that July/August convergence, we will see an opportunity for either a magnificent reversal or severe correction.  That point is where the 2 yr upchannel support and reversal trend resistance converge.  After that point, we'll know in which channel we truly belong, and if the head-and-shoulders reversal from the latter half of '07 has truly stuck.  In this scenario, I think a bullish bounce out to the 13,000 mark is more likely than a drop through 11,000, but not much more likely, even given that it's the 3rd quarter of the year and traditionally bearish.

-I must admit that even though I'm a perma-bull, the bears have a mighty case that we're in for some trouble.  The failure to break and sustain anything above the 50d moving average for the last couple of months coupled with absolutely nothing close to a test of upchannel resistance since breaking it in late December has me worried that we will see 11,000 this year.  But, in my bullish opinion, 11,000 just represents massive buying opportunities!

Thanks for the chart, tfax.  It's like taking a trip down memory lane!  Thanks Ron as well -- very interesting and plausible scenarios you point out.

I tend to use the S&P 500 chart rather than the Dow, as it seems more representative of the overall market.  That said, the long term Dow chart is clearly in better shape so perhaps I'm being overly pessimistic.  The Dow chart does appear to have support in the 11,500 to 11,800 area that you guys mention.  That's only 4-6% down from here... not bad at all.  A simple retest of the January lows and we could be back to the races.

I find the S&P chart a little less encouraging.  The long term trendline there is about 12-14% below our current level (around 1150 to 1170).  Also, there is that disconcerting double top staring us in the face.  I suppose the bulls would argue it's an ascending triangle or cup-with-handle in the early stages... hope springs eternal ;)