Charting The Multi-Timeframe Make or Break Support at Dow 12,000 (DIA, SPY, IWM, DOG, DXD)

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August 1, 2011 9:45pm NYSE:DIA NYSE:DOG

Corey Rosenbloom:  Well, here we are at the well-known Make or Break chart support at Dow 12,000. This is what I mean when I say refer to critical chart reference levels to make objective sense of all the good and bad – often confusing – economic/political headlines affecting the market

 at the moment.

It’s really as simple as “The market is holding critical support so that’s objectively bullish, or it’s firmly breaking strongly under critical support which is objectively bearish.”

If you’re finding yourself confused as to which way is up or down in the US Equity Markets, take a moment to look at the following reference charts:

If you prefer the S&P 500, check out my prior reference post on the S&P 500:

“Making Sense of the Current SP500 Market Range”

“SP500 Critical Support on Weekly Trendline Confluence”

I’m a fan of keeping charts (technical analysis) as simple as possible and here it is:

Either the market supports and holds bullishly at 12,000, returning higher as it did recently in 2011 or it doesn’t, which opens up the door to expect 11,500 or even lower for a full trend reversal.

What we’re seeing presently in 2011 is very similar to that of mid-2010 where 10,000 became the major market “Make or Break” Bull/Bear Line in the Sand.

It’s not magic and price didn’t respect 10,000 perfectly, as seen with the 2010 low of 9,600 in June.  We could still see a similar “nip” or trap here at the 12,000 level so don’t expect 100% perfection of chart magic.

Key levels reflect true battle points between Buyers and Sellers (Supply and Demand).  A key level that breaks thus forces action from those trapped by failed expectations.

Subsequent moves create “Feedback Loops” that send the market moving off the inflection point in a sustained move.  Traders look to take advantage of these low-risk points.

Let’s step inside the Daily Chart to see another reason why 12,000 is so important on the chart:

Similar to 1,280 on the S&P 500, the 200 day Simple Moving Average rests almost exactly at 12,000 which joins both the short-term trendline from the March 2011 low and the intermediate trendline as seen on the weekly chart.

Buyers have placed simple stop-losses under 12,000 and 11,900 (June low) which will be triggered should sellers push the index under 12,000 then 11,900.  That’s something a trader can expect.

A breakdown under 11,900 returns the market to 11,600 where it will be a major battle of buyers and sellers.  Should buyers/bulls lose the Supply/Demand battle at 11,600, then this could be deemed as an intermediate term sell-signal which would suggest (or confirm) a trend reversal down on the higher timeframe.

Key levels like this aren’t magic – however, they often trigger self-fulfilling prophecies that result in perpetual moves called “Feedback Loops” where traders can take advantage (or limit losses if caught on the wrong side of a feedback loop).

Speaking of Traders, aggressive short-term traders can easily take advantage of a price movement into a major/key price level:

Let’s assume you are an intraday or swing trader looking to buy into the expected support at Dow 12,000 (whether using futures or the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) or corresponding stock or ETF).

As the Dow tested the critical 12,000 level from 10:30 to 11:30am (CST), we observed reversal candles that were accompanied by both a positive momentum and TICK (market internal) divergence.

The combination of reversal signals and positive divergences off a critical make-or-break support level suggested odds favored an upward reversal in price.

If the upward reversal thesis failed, then that’s ok because this situation allowed for a tight stop under the 12,000 level (11,990, 11,980, and so on depending on your risk tolerance).

Keep in mind that price has a tendency to nip a few points under a critical level before reversing – we call this a “Finger,” “Trap,” or “Rinse/Wash” Situation.  It happens.

Aggressive traders like to buy INTO a support level while conservative traders like to buy AFTER support held and price then breaks a falling trendline or moving average.

Price broke above 12,050 at noon, then broke above 12,075 at 1:45pm.

It can be a little less stressful to buy on a breakout than buying into support, at least if you want greater odds that a support level is holding.

At 12:30pm, the TICK (internal) gave a “Kick-off” Reversal signal which further confirmed that the odds shifted to favor a positive/bullish reversal.

As of this writing, price rallied higher from 12,000 to the 12,125 level.

Anyway – that’s a discussion of a short-term intraday set-up, the kind of which I describe each day in the Idealized Trades reports (with more detail, explanation, and trade logic for reference).

The main idea is this:

There’s a lot of economic and political news affecting the market at the moment – more than usual.

At times of increased noise and volatility, it’s important to pull the perspective back and look at the big picture to focus on critical price levels in key markets.

For now, 12,000 is the critical reference level to watch in the Dow Jones, just as the 1,280 and 1,260 level is critical to watch in the S&P 500.

Use these levels as references to guide your game-plan and trading decisions accordingly – otherwise you may feel very bullish one day and then tremendously bearish the next.

Ground yourself with objective price reference levels and observe how price is behaving at these levels.

Related ETFs:  SPDR Dow Jones Industrial Average ETF (NYSE:DIA), SPDR S&P 500 ETF (NYSE:SPY), iShares Russell 2000 Index ETF (NYSE:IWM), ProShares Short Dow30 ETF (NYSE:DOG), ProShares UltraShort Dow30 ETF (NYSE:DXD).

Written By Corey Rosenbloom, CMT From Afraid To Trade  

My name is Corey Rosenbloom, CMT (Chartered Market Technician) trader, educator, analyst, and I am excited to share with you my experiences studying and trading the markets and to hear from you regarding your experiences, challenges, and frustrations, and successes. My goal is to create a community dedicated to reaching out to those who have been burned by the market or are anxious about risking their money to make money in the stock, options, or futures markets. Together, we can share strategies and learn how to overcome crippling fears that keep us from achieving our highest potential.

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