As I mentioned earlier in the week, I got stopped out of my Dow trade on one of the days it spiked down. I had moved my stops up so that position was risk free but getting stopped out always has a detrimental effect on one’s view of a particular market.
Although not actually in the market I have been watching the Dow closely. Inauguration Day was a washout (one of the worst on record), but this was followed by a huge rally, which was followed by another sharp sell-off. Although nowhere near as volatile as a lot of the action seen during 2008, volume was still notably high. So what does this mean?
Given the level of uncertainty in the market drawing definitive conclusions can be dangerous, but I still think there are two prominent factors to take into account.
First 8,000 is clearly a critical level of support for the Dow. Although we are not able to use the system at the moment, it is clear that this level is significant. When markets tanked in the final quarter of 2008 it was at this point that plummeting stocks stopped plummeting. Since the lows were first hit we have seen 2 failed rallies bounce off this point. I say “failed rallies” because they both reversed at about 9100. When we consider the dire economic data and earnings announcements that have occurred over this period, this reinforces the view of the importance of 8,000 to the Dow.
Second Obama is now in office. So far the total absence of a positive market reaction to his appointment has been surprising. Given the massive mandate he has for change and the level of his popularity this is a clear indication of the prevailing negative sentiment. However Obama’s first great economic test occurs in the next fortnight. He has to ensure that his stimulus package passes through Congress and the Senate without any trouble. It is vital that this happens without anything like the controversy the TARP caused. While I do not believe that the Obama stimulus will solve the economic crisis, its smooth passage will likely be positive for US stocks.
Dow futures dipped 40 points after the market close on Friday night. I am going to spend the next 24 hours doing some more research, but I think I might reopen another small position on Sunday night.