I wanted to thank a couple of readers who brought to my attention the Fibonacci retracement grid from 1975 to the 2007 highs in the Dow Jones Industrial Average which recently has interesting if not outright actionable information regarding the current structure and possible large-scale inflection point (support) we just tested.  Let’s look at this development.

Dow Jones Industrial Average Monthly chart from 1975:

Click on the images for larger than normal grids.

From the 568 low in 1975 to the 14,200 high in 2007, we get the resultant Fibonacci retracement grid if drawn from the highs to the lows.

From this, we’re able to see the significance of the 7,382 price level, which contained the 1998 “Asian Contagion” market crash as well as three successful tests (with the actual low breaking the price just slightly) during the 2001-2003 bear market, and recently a (currently) successful test of the level last week.

Let’s zoom in to see these developments in a more compressed chart-scale.

Dow Jones Industrial Average Monthly chart from 1996:

With the exception of an intra-month “nip” below 7,382, that level has held like a rock each time price tested it.  Thus, from a technical perspective, we cannot underscore how important it is that the 7,382 level held (actually 7,449) from a chartist’s perspective.

Coincidence?  That’s the largest argument against Fibonacci principles, but regardless, the level has provided support multiple times which - in and of itself - makes the index level quite significant and should not be ignored from a trader’s or an investor’s perspective.

What are the possible implications from this (currently) successful test?

Again, use your own analysis going forward, but it could mean at least a short-term if not intermediate term bottom in the market, should this level indeed be so significant.  It also means we have an extremely favorable reward to risk ratio from a swing to position trader’s perspective to place a stop beneath this level and ride a potential counter-trend wave up to the 10,000 or 11,000 level at the most.

It most likely means that any shorts need to cover if they have not done so already (Friday and today have been brutal for the shorts, and heaven-sent for the bulls).

What if we break these levels?  Again, trading is not about foreknowledge, but more about managing risk relative to potential reward - and finding high-probability ‘windows’ of opportunity amidst a sea of seeming randomness.

If we break these levels, look for the next downside target to be Dow 6,000.  But that’s… a whole other story.

Corey
Afraid to Trade.com