The Dow Jones Industrial Average is one of the most tracked indices in the world — a key indicator for both the U.S. economy and the strength of the overall market.
Well, this highly watched index is crashing lower, and it’s about to take out a key resistance level that could mean much lower days ahead on the Dow Jones.
That key resistance level is 16,000.
If the Dow Jones Industrial Average falls below 16,000, it’s not the end of the world … but it would mean that a new, lower trading range on the DJIA is likely to form. The Dow would be falling below a resistance that has held up since the market’s correction in late August.
Since that dreaded day on Aug. 24, when the Dow Jones collapsed 1,000 points, it has recovered nicely to trade above 16,000 and has successfully tested the 16,000 level twice.
As seen in the chart above, those 16,000 tests came soon after the DJIA recovered from its Aug. 24 lows. Since then, the Dow has mostly traded higher, even nearing 17,000 on Thursday of last week.
But the past week has seen an aggressive push lower, and that has to worry investors who are long this market.
Why Dow 16,000 Is So Darn Important
The Dow Jones Industrial Average is just 34 points away from 16,000, so consider this a third test. And if the DJIA fails this test, there’s a good chance it could keep falling until retesting the lows around 15,370 set on Aug. 24 — some 4% lower.
That 15,370 mark roughly coincides with the 50% Fibonacci retracement level from the Dow’s big upside move from late 2012 through the middle of this year. Looking a step lower, the 61.8% retracement level would take the DJIA down to around 14,740, which would be nearly 8% lower.
If you’re looking for a particularly ugly-case scenario, a return of the Dow to its late 2012 valley would be a roughly 20% decline from here.
For protective purposes, watch the Dow around this level. Should the DJIA break below 16,000 and sustain sub-16K levels, expect selling to intensify and volume to increase as the market makes a major run lower.
Should the Dow Jones Industrial Average make a strong break below 16,000, increase your cash positions and sit on the sidelines patiently. Such a move lower would put the markets in unfamiliar territory, and when such a thing happens, it’s best to get rid of volatile momentum stocks until the market finds some footing.
With that said, if the Dow falls to 15,990 or barely breaks below 16,000, there’s little to worry about — and in fact, that could trigger a technical bounceback.
Bottom Line
At this point in time, one scenario seems just as likely as the other. As a result, the best policy right now is to wait, be patient, and to see what the market does.
If the Dow Jones breaks lower on high volume and heavy selling pressure, then increase cash and sell your high-beta stocks. More aggressive traders could consider market puts and shorts.
However, should the DJIA reverse off 16K, especially on heavy buying volume, it might be a good time to get long and buy the same momo stocks you would otherwise be buying. Of, if you wanted to be more careful, you could buy call options on the way up.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
