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In Focus: Dow & 27,000

Sometimes there are people or things that just can't get along. Popeye and Brutus, Bugs Bunny and Elmer Fudd, oil and water, hot pizza and the roof of your mouth, and the Dow Jones Industrial Average and the 27,000 level. Over the past 12 months the Dow and 27,000 have come close to meeting, met, gave each other a pound, hugged it out once or twice, but then the Dow leaves, heading below 27,000, as if the air above 27,000 is worse than the air below it.

Technical traders have seen this type of thing before. Many traders, or at least the good ones are aware of the psychological levels of the markets and stock charts, for example, a stocks first time breaking the $100 price barrier. The triple digit level serves as a psychological barrier for traders and investors. As the stock or market approaches the psychological level it will behave in one of four ways.

1. It will blow past the $100 level and never look back. It's rare, but it happens.

2. The stock will approach the $100 level, investors and traders will get stingy with their money, and the stock price will fall before touching $100.

3. The stock will touch the $100 level and instantly sell off, as if all investors and traders had their sell limit orders at $100.

4. The stock will trade over the $100 level and hangout for a few days, a few weeks, or a few months. But then the stock price falls below the $100 level, sometimes well below the $100 level, and back to a former level of resistance which will then serve as support.

It's a Matter of Value

If you're wondering what causes these psychological levels of resistance in the markets, it's just a matter of value. Value, a word you hear associated more with fundamentalists than with technicians. However, when stocks hit a psychological level of resistance it's because both fundamentalists and technicians find no value in the stock price at that level. Stocks have no understanding of where they are on the charts, it's the psyche of the investors, traders, and their wallets, which set the psychological barriers in the markets.

Source: Yahoo. Support and resistance of the Dow Jones Industrial Average

The Trillion Dollar Psychological Level

We saw this happen last year, when Apple surpassed the trillion dollar market valuation for the first time in August 2018. The stock hung out in the super exclusive trillion dollar market cap club for a few months, but at that market cap, traders and investors found no value, and the stock price dropped, falling well below the trillion dollar mark.

Psychological levels, they can be hard to grasp when you first hear about them, but the more you trade and invest, the more you see it play out. At the $100 level, the $200 level, the $1,000 level, and for the Dow, the 27,000 level.

Courtship of the Dow and 27,000

In the case of the Dow breaching and holding above 27,000 it hasn't been an all technical issue. There have been events that have eroded some fundamental aspects of the markets causing the Dow to play jump rope with the 27,000 level, and I'll discuss a few.

On 10/3/2018 the Dow trades to a 26,951.81 high. Investors were giddy over the new NAFTA deal at the time, which helped propel the markets upwards. Though after a few days with the deal, investors realized the new deal looked a lot like the old deal with some small changes, and the Dow faded from the high.

7/11/2019 the Dow crossed 27,000. Around that time Fed Chair Jerome Powell testified before congress. Powell admitted that trade issues were restraining the economy, but hinted at an upcoming rate cut and investors celebrated by flooding the markets with money. 14 trading days later the Dow fell below 27,000 after President Trump accused China of intentionally delaying a trade deal.

Fed Chair Jerome Powell

9/11/2019 and the Dow crossed 27,000 again. President Trump's announcement of a delay on $250 billion worth of additional tariffs on Chinese goods was just one of the catalysts for the markets move up. Within that same time rumors surfaced that the Trump administration was considering a preliminary trade deal with China, rumors that the administration denied at the time. Also, the European Central Bank announced rate cuts. Seven days later though, the Dow dropped below the 27,000 level after news of dealings between Trump and the Ukraine surfaced. On 9/24/19 the House of Representatives begins a formal impeachment inquiry into Trump.

10/15/19, 10/16/19, 10/17/19 the Dow played around the 27,000 level. The White House announced that a preliminary, phase one trade deal with China was close. Several days later news stating that China wants to discuss the trade deal a bit more before finalizing the agreement keeps the markets from making a significant move up. On 10/18/2019 the Dow drops below 27,000.

10/28/2019 the Dow again breaks above 27,000 and that's where we are now. The Fed provided another rate cut on 10/30/19 to assist the markets in maintaining the level, but what's next? Could we see another announcement that a trade deal is close or another round of tariffs? The impeachment inquiry news has gone dark, there are articles and updates being written for those who are extremely interested, but it's no longer the lead story, but that could change shortly.

Where to Next

The Dow is just a couple of points away from hitting all time highs, which will be exciting news for investors and traders, but I'm still wondering will the 27,000 level hold? In comparison to other major levels of the past, the 27,000 level has been difficult for investors to come to terms with. The Dow struggled to surpass 21,000. There was a small and brief pull back before breaking 22,000. 23,000 saw slight resistance. The Dow blew past 24,000 and 25,000. In early 2018 the Dow traded above 26,000, but the markets saw a deep pull back not to long afterwards, and the market fell all the way back to the 23,500 level.

It's been an absolute roller coaster since early 2018, giving traders who are good at playing peaks and valleys tons of opportunities. For the boring value investor, the guy or girl who wants to invest during sales and hold long term, the markets continue to provide opportunities for you too.

I don't recommend shorting in this article, nor do we recommend it in our newsletter. Short positions require babysitting, which a lot of investors don't have time to do. But I've spent the last year using SPY puts as a proxy for shorting the Dow. The shorts have been very short term, what traders would consider scalping. I take a few points here and there, as the Dow falls below 27,000. Although the SPY tracks the S&P 500, I've found it's price level of $300 per share correlates with the Dow's 27,000 level. I don't currently hold a position, even though the Dow presented a very nice signal candle to short off of on October 17, 2019. But shorting the markets as we entered earnings season didn't appear to be a smart move.

But how will the Dow react as the earning season wines down? Will we see another fall below 27,000 or a move up towards 28,000? I've personally had enough of 27,000, let's see what 28,000 feels like.


What is The Seville Report

The Seville Report is our attempt to bring world class investment research to people who feel world class investment research isn't available to them. We also want to demystify the stock market for people who wouldn't normally think of putting their money in the stock market. Our research comes quarterly via our newsletter, The Seville Report. We use the website and this blog to share thoughts and ideas about the markets and different companies.

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