Chart of the Day 05/27/2011 - Dow Testing Support

Today's chart of the day for 05/27/2011 displays the DOW going back to 2003 with two different historical support levels.

Support levels are important for charts with up-trending price movements because once these support levels are breached, significant moves lower can and often do occur.

One reason a significant move lower can occur is that there are many other traders and investors watching the same thing. Once prices show weakness and move below the support line, people start exiting their positions in many cases, using the support line as an exit or stop loss signal.

Another common characteristic is that the more times prices test (or approach) the support levels in the same directional trend, the weaker the move often gets. This means that by the time a stock tests the same support level 3, 4 or 5 times (as in the case below), many of the weaker traders and investors have already gotten out. The one's who are remaining are the ones who are getting out in the latter tests resulting in no one else to keep the trend in force.

Despite a host of concerns (weak recovery, high unemployment, ongoing foreclosures, commodity price spikes, debt crises, geopolitical issues, etc.), the Dow has managed to rally sharply over the past two years and currently trades 12.5% below its 2007 non-inflation-adjusted, all-time record high.

As today's chart illustrates, the post-financial crisis rally was especially sharp during its first year. Since then, the rally has settled into a more confined uptrend channel.

It should be noted, however, that the Dow is currently testing support (green line) for the fifth time since March 2009.

Chart courtesy of Chart of the Day
Dow testing support

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