Dow Key Levels: Trading and Investment Strategy in an indecisive Trend

All of you reading this post would agree that stocks are not showing a clear trend convincing enough to put the cash at work. There are bouts of optimism like we had at the start of year, but then it all appears shallow. The Dow Jones Industrial average is trading marginally above where we started the year and now it is threatening to revisit recent June lows. This is a listless market stuck in a range, and it has nothing for the long term investors. Volatility is the name of the game, and only brave hearts should try to time this market.

There is so much to talk about, be it Europe, Fiscal Cliff, another round of QE, or the slowing giant China. You many include many more current issues that the investors and traders are closely tracking these days, but nothing will help you identify the direction of the next big move. In this post we will discuss key levels that you should watch out on the Dow Jones Industrial, as they could give you reliable triggers for the rest of the year. It’s no use reacting to news flow these days as it changes sentiments dramatically every day.

In January the Dow had decisively broken out of key resistances placed around 12,500 levels, but then the rally faded around 13,300 in April. Now the key question is whether this was a false breakout? From the April top the Dow fell sharply and found support near physiologically important level of 12,000 and then made another failed attempt to sustain above 13,000 levels.

Right now the Dow is trapped in a wide range 11,800 and 13,400. Within this range it trades between 12500 and 13,000 when the news flow turns positive. The range moves down to 12,000 and 12,500 when the investor confidence is low. So, what should be the trade strategy to profit from such volatile moves?

 Dow Trading Strategy for Remaining 2012

The make or break level for long term investors would be 11,500 on the downside and 13,500 on the way up. We may not cross any of these two levels in a hurry, but these are critical levels that will make way for the next big bull or bear market. The wait for these levels could be long as there is a fair chance that we might grind within this range throughout the year.

So, the best strategy for investors is to allocate money at around 12,000 and 11,500 should be their stoploss. Positions initiated around 12,000 should be closed around 13,000 if your investment horizon is about an year. Long term investors can book partial profits around the top of the range and then average their purchases as the index nears 12,000.

Strategy for Positional Traders

The strategy for traders is a bit different. The recent failed attempt to cross 13,000 has created ample resistance in that area. So, every pop above 12,700 should be used to short the index and the stops should be placed around 12,850. The Dow has some trading support at 12,500, but it’s not a good level to buy in a falling trend. Traders may look at booking partial profits in this area and let the remaining positions ride till 12,100. Any dips to around 12,000 can be used to buy expecting some relief rallies in that region. On the contrary if 13,000 is taken out convincingly, then traders can play longs for a targets between 13,300 and 13,500.

We expect the the Dow to retest recent June lows before it attempts to take out long term bull trend resistances placed above 13,000.

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