How to take advantage of significant resistence in Dow Jones

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The chart above is a weekly Cash Dow Jones Industrials. The reason we are looking at this today is that it is approaching the .500 Fibonacci retracement level of the October 2007 high to the March 2009 low. Some of our clients that have been expecting the market to rally toward this significant price level are talking to us about a “Sell and Hold” strategy.

This has been quite a rally since the March lows were put in. We are seeing some analysts suggest though that stock prices in general have reached overbought or more specifically overvalued levels. One that we saw very recently stated that these were historically overvalued levels. We must admit we have seen over time many interpretations of “value” measures so it is difficult for us to put our faith into these claims. There may be, however, many factors that are coming into play that should cause all of us to be alert to what could be a sizable correction. We never truly know what lies ahead ultimately and what starts out as a correction could be the resumption of the bear market which many believe began in March 2000.

We have also seen the Daily Sentiment Index break above the 90 percent level which contrarians would be keen to follow. Many of us are familiar with this and realize that if such a large percentage of people are bullish of something a top or correction of some sort is likely imminent. We also are aware that there is that faction of economists that have been warning about the double dip recession. Foreclosures continue and may even escalate according to some accounts. Could there be another credit crunch around the corner if this were to happen?

The uptrend since the March low is rather discernible. One thing we would key on as an approach to short entries is a break of the trend line connecting the March and July lows and particularly a close below it.

We are not suggesting this doom and gloom scenario will come to pass but thought that since this major stock market index is in ear shot of a significant retracement resistance level that it was worth presenting.

Good trading to all

Jeff and Diego

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