How Low Will The Dow Jones Industrial Average Go?

You’ve probably heard by now that the major stock indexes, including the Dow Jones Industrial Average have just entered bear market territory. A bear market is usually defined as a drop of at least 20% from a top. For example, the DJIA has dropped from its intraday high of 14198.10 on October 11, 2007 to an intraday low of 10977 on Friday, July 11, 2008. That’s a drop of 22.6 percent, which certainly signals a bear market.

So, the only question at this point now that the bear market is here is how long and how deep will the bear market be. Of course, no one actually knows without having a crystal ball that works. However, by studying a chart of the mini-size DJIA, we can see if we can find some points of support that the DJIA might test.

In looking at the daily, weekly, and monthly charts of the mini-size DJIA, one can see a several points of support below where the DJIA is right now. The first level of support is the 11000 level. And, considering that the DJIA is at 11047.70 as I write this on Monday, July 14, the next test of support will be to see whether or not the DJIA will close below 11000. Of course, that almost happened on Friday, July 11.

It’s interesting as I look at the weekly and monthly charts of the mini-size DJIA, that there is some support at all the round 500-point increments, such as 10500, 10000, 9500, etc. Moreover, what I see is that if the 11000 support doesn’t hold, then there is strong support again at the 10500 level. So, that would be the next big test. If this support level fails to hold, then the next strong level of support will be the all-important psychological level of 10000. If the 10000 level fails to hold, a sell-off could be especially steep as the next strongest levels of support are the 9000 and the 8000 levels. Below 8000, I can see from the monthly mini-DJIA chart that the DJIA could test its low of 7174 made on October 1, 2002. That’s when the financial markets were still reeling from the effects of September 11, 2001, and the failures of Enron and WorldCom, Tyco, etc.

Of course, I’m not in any way predicting that the DJIA will fall to any of these levels. I’m just pointing out that price charts can provide a wealth of information. For example, anyone wanting to short the DJIA Index could use these points of support as indicators of where to enter an exit the market. On the other hand, one of these levels of support will probably be the point where the DJIA will turn around. Time will tell.