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Dow Industrials claw back to 2000 lows

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The Dow Industrials have managed to claw their way back to the lows of 2000, but came just shy of our 38.2% retracement level that was fitted to the chart of the Dow Industrials based off of key inflection points.

Dow Industrials Chart -

We "fit" a retracement bracket on the Dow Industrials some time ago when we were trying to establish support levels when the Dow broke the 9,100 level to the downside back in mid-September. After we did that, the Dow did seem to find support near 61.8% retracement of $8,481. Since that time, we've seen a break above the $9,105 level and have seen an all out assault on our retracement near $9,729. This 9,729 level was a point of past lows found in March and October of 2000 that many technicians felt was "critical" support for the index to hold.

Since many felt that those "lows" were important support, I'm thinking they now become "critical" resistance for the bears to hold.

Earlier today, we showed a retracement bracket overlaid on shares of Merrill Lynch (NYSE:MER) where we had a retracement level of resistance at $50. Perhaps that level correlates very well with what we're seeing in the Dow Industrials near $9,729. While Merrill Lynch (MER) is not a Dow component, a trader holding or thinking of trading MER has some good correlation of levels to begin monitoring as resistance going forward.

Until the Dow Industrials can break above the $9,730 level, I want to enter futures trades with the thought, "Dow Industrials range bound between $9,729 and $9,105" to help me assess future risk reward in some trades, relative to a major market average.

S&P 500 Index Chart -

I'm liking much of the hard work we've done with our "fitted" retracement brackets. Note how the S&P 500 broke just above the 50% retracement level of $1,126, but has slipped just back below. Action here mimics similar trading in the Dow Industrials.

Strategy

Right now, traders want to be looking for stocks that are breaking out of bases in their bullish trades and trying to avoid buying stocks that appear over-extended on their charts near- term.

A perfect example of this would be recent commentary regarding a "chemical" stock in shares of Neogen (NASDAQ:NEOG). On Friday, we highlighted the stock near the $21 level as it had just broken out of consolidation and given us a bullish triangle pattern at $20. The stock surged to a high of $25.21 (+20% from $21) over the next two sessions. The past two days, the stock has now pulled back near the $21 level, most likely on profit taking in an overextended stock.

Look to play the break-outs with a rather short-term mentality. If you get a profit going of more than 7%, then snug up that stop!

We're also going to be wanting to be looking to short stocks in sectors where both relative strength of the stock and sector are on sell signals.

This will take us some time to get a list together as we've been bullish for the most part. The first group I look for weakness would be the Insurance Index (IUX.X) as hit has been lagging the rally.

Still, bearish traders need to understand that often times, "a rising tide will lift all boats" and be careful in what types of stocks they're trading. The use of disciplined stops becomes mandatory.

Jeff Bailey
Senior Market Technician
Option Investor

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