The Dow has been going up and down all year and August has been a bad month. Today it closed below 10,000 and if you look at the chart below, you will see we have gone nowhere in over 10 years now. The Dow Jones first closed above 10,000 on March 30, 1999 and here it is August 26, 2010 and we are right back at the same place! That is a long time to have gone nowhere.
Was there support at 10,000 and have we just broken below it? Will tomorrow and the weeks ahead mean the selling will accelerate because we have closed below 10,000? And what exactly is support and resistance in the stock market anyway? These are two terms that you might need a Stock Market For Dummies book to understand.
Support is a technical term that means there is a bottom price where there seems to be more demand than supply. In other words, once a stock (or the Dow) drops to a certain point, there seem to be enough people that rush in to buy because they feel that is a good price. This means that it is difficult for a stock to pass below support because people will usually buy it up. Once it does pass below support, that is a bad sign because it shows that there are few buyers willing to buy.
Resistance in the stock market is just the opposite of support. In the case of resistance, it is a price above which there are more sellers than buyers. If a stock goes up but has trouble passing a certain point, it is because that is the price that people are happy to sell at and take their gains. When a stock rises above resistance it is a very good thing because that demonstrates that demand for the stock is high and there is more demand than supply.
10,000 in the Dow is not a technical support or resistance level: it is just a number. However, it is a number that is special for psychological reasons because 10,000 sounds and looks so much better than anything in the 9,000's. People, whether they are aware of it or not, respond to these psychological stimuli and are more apt to attach importance to them.
The Dow closing below 10,000 on August 26th, 2010 may make people sit up a little more and wonder whether this signals more bad things to come. Or, they may think nothing of it and the market will go back up tomorrow. That is what is so fascinating about stocks: you never know how people are going to react to situations that come up on a daily basis and it is people willingness to part with their investment dollars that drives the stock market up and down.
