Market Finally Tests Lower Prices

May 20, 2008: 12:51 PM CST

After failing twice at its 200 day moving average, the US Stock Market indexes tested lower levels, and do so with a sharp sell-off.

Let’s view the larger picture of where price is on the Dow Jones Index:

The most recent action is not the end of the world by far.  Price appears to be rolling comfortably as the demand/supply relationship is quietly shifting in a rounded formation.

Price is failing to surmount the falling 200 day moving average, but at the same time, the 20 and 50 period moving average appear ready to meet the decline with potential support.  Combine that with the potential support of the February ‘double top’ highs (near 12,700) and that area (or at least into the consolidation area just beneath it) could be yet another support zone.

A negative momentum divergence has formed as price has carved its way slowly higher.

The weekly chart shows further support at these levels, which may halt significant further downside action:

Dow Jones

I can’t remember the last time I’ve seen so many lines converge both above and below the price as we’re experiencing now.

The red down trendline connects price highs which was recently broken, and could serve as support.

The rising black line connects price lows which is still (currently) in-tact and could serve as support (though I feel it’s more likely to get broken soon because of its steepness).

The flat black line connects prior price lows (and current price highs) and also corresponds with the important ‘psychological’ level of 13,000.

Also, the 50 and 20 period weekly moving average are converging near 12,750, which could further serve as support.

It’s such an interesting time as an analyst right now, but as a trader, it’s so hard to anticipate what’s about to happen next.

The good news is that no matter which position you take (whether prices will continue higher or reverse and go lower), the places to position your stops (in case you are wrong) are so close to your entry either way that the risk is low and the reward is high, provided one of those levels gets battered and price makes a trend move higher or lower from here.

Let’s keep our eye on these developments until price (traders) can figure out which direction it will resolve.

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