It has only taken two weeks since the Dow put in a high around its 200-week moving average for the US stockmarkets to fall back to touch their 50-week moving averages.  Yesterday’s price action, with a 580-point Dow sell-off in the space of 4 minutes followed by a 580-point bounce-back in the following 8 minutes, printed its V-bottom 42 points below the Dow’s 9911 50-wma and scored a direct hit on the S&P’s 1066 50-wma.

Whatever the reason for the extreme spike down in the indices (fat finger error or otherwise – only the sellers who sold during the fall know the real reason for the 580-pt spike down), the price action formed a low point on the price charts at a valid support level.  Hence we now have a 9869-11258 trading range in place on the Dow.

Remember that the bigger picture (see Anatomy of a Secular Bear Market) called for a rally off the bottom followed by a deep pullback to create a trading range.  Now that we have a trading range established, we know for certain that eventually the market will test either the top or the bottom of this trading range.  These price points provide support and resistance levels for sensible long-term investors to rebalance their portfolios, buying additional stock at the bottom and taking profits at the top.

Eventually this trading range will be broken, but for now we have two clear levels to trade around until the range does get broken.  Although a 12% range feels a little narrow, it may well prove to be a surprisingly long time until this trading range gives way.

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Tags: 200 week, 50 week, bear market, dow, moving average, resistance level, S and P, secular, support level, trading range

This entry was posted on Friday, May 7th, 2010 at 4:55 pm and is filed under Blog, Markets. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.