Dow Dropped Below 8,000, What Is The Big Deal?

What is the big deal with the Dow and 8,000?

As I was writing this post, I came across a post on bloggingstocks.com that talks about the Dow reaching 8,000 and what level it may fall to next.

The Dow has been below 8,000 before and it may drop below 8,000 again. What makes a 100-point drop from 8,050 to 7,950 so much worse than the same point drop 8,250 to 8,150?

That would be another tool of the technical analysis trade: support and resistance levels. Think of these two as a price floor and a price ceiling, that people place on the value of stocks or an index.

A support level is a price point that stocks or an index can fall to before bargain hunters begin scooping up shares. They believe the asset is just too cheap. A resistance level is a price point that stocks or an index can rise to before profit-takers begin selling the stock. They believe the asset is too expensive.

The battle between the bargain-hunters and profit-takers of the world keeps technical analysts in business. These are the traders that aren’t really concerned with the appropriate value of the underlying stock. They watch price ranges and trading volume to identify what price level investors believe is too high and what is too low.

The bright side of technical analysis: if the pattern continues, a trader can repeatedly profit, using the same asset, by buying at support levels and selling at resistance levels. They could also profit from short-selling at resistance levels and repurchasing the stock at support levels.

The not-so-bright side: if too many traders identify and begin trading on the support and resistance levels, the previous stock price pattern will not continue. Then it is back to the drawing board to find new support and resistance levels.

So what is the big deal with the Dow and 8,000? It is not President Obama and it probably is not the real value of the Dow. It is mental.

Simply put: people like round numbers and 8,000 happens to be a nice big one.