DOW JONES INDUSTRIAL AVERAGE
Thursday, October 23rd, 2008

Yesterday was a directional change that was difficult for investors, including me, to stomach. For no other reason than it went against my assumptions, thinking and research. Since hitting the low on October 10th the index has been attempting to bounce and build a trading base short term. Unlike many in the past I have experienced, this one is more volatile. That is evident by looking at the VIX index, which now stands at 70. That aside my thinking has lent itself to a bounce off the lows and then a retest of those lows. That took place over the last two weeks. The move higher with some momentum behind it lent itself to a short term move back near the previous support. That being $105 on the chart below. This was the previous support before the financial crisis took over everyone’s thinking and pushed the panic buttons on many trading desks. But, the broad based selling yesterday changed the view technically. Another retest of the lows at this point isn’t exactly encouraging.

Today I am looking at the Dow Diamonds (DIA) as an example of what has taken place on each of the major index charts. I just chose this one to illustrate my view. First the closing low is $83.75, it is back in play as potential support. If we hold here great. If we break below, but still hold the intraday low ($78.94) I’m okay as well. However, break those lows on the close and we are in different territory for the index. Second, the trendline on the chart are worth watching as well. The short term trend in pink would be the first hurdle for any upside. That is currently in the $90 range. If we were to get through that level there are a series of resistance/obstacles to face. The important point here is the downtrend is predominate short, intermediate and long term for this index. Thus, the sentiment and bias at this point are negative. Third, we are in the process of attempting to build a tradable base on the index.



Strategy: Short term we could take a downside play (short or put option) based on the current momentum. If so I would use an entry near $85.25, stop near $86.20, and a target near $79. That is a short term view. Going long I would look to hold support at the intraday low $78.94 first. If that hold and entry point near $80, a stop just blow the intraday low near $78.70, and a target near $93.40. The volatility of the market currently lends itself to opportunities on both sides. The key is know your personality in choosing which play fits. If you are not an investor who like shorting wait for the long side play to develop. If your personality doesn’t fit short term trading pass on both. If you want a longer term view read Friday’s post, Long Term Outlook. Before investing define your strategy and make sure that strategy fits your trading/investing style and personality.