Bulls And Bears Beware: The Dow Jones Is At A Tipping Point

| About: SPDR Dow (DIA)

With the Dow Jones Industrial Average (NYSEARCA:DIA) closing above 13,000 once and crossing this threshold six times, it is time to discuss whether 13,000 will be a ceiling or a floor in the near term. It is clear that the 13,000 level is currently a strong resistance point in the form of a ceiling. Therefore, three scenarios can materialize from here:

  1. The Dow will be unable to breach this level for a sustained period of time and the index will continue to falter.
  2. The Dow will breach the 13,000 level and 13,000 will immediately become a floor.
  3. The Dow will fluctuate between the 12800-12950 range until the macroeconomic future is determined.

The important question is which scenario will happen? Well, there is plenty of ammunition for either event. Bullishly speaking, the share price will break through 13,000 and keep heading higher. However, this has happened a half dozen times and it was unable to stick. This is what bears want to happen. Bearishly speaking, the Dow Jones will continue to slide after failing to hold the 13,000 level. This should be fairly obvious by viewing the charts. Therefore, let us take a look at what future events may cause the Dow Jones to make a sustained move either way.

By viewing the Dow's chart we see that the index followed a similar trend prior to the current trend. On February 3rd the Dow Jones made a substantial 157 point surge that preceded a brief upward trend which broke 12900 followed by a recovery phase. After this, on February 16th the Dow Jones had another 125 point surge that left the 12900 level in the rear view mirror. This led to the current inverted parabola, where the Dow has been unable to hold the 13,000 level-- similar to how the Dow was unable to hold the 12,900 level.

This is important because these two trends may be indicative of what is to come. In a bullish scenario the Dow Jones will soon make another substantial upward move that puts the 13,000 level in the rear view mirror as well-- just as the 12,900 level. Since the Dow Jones reacts to macroeconomic events as well as the 30 companies that compose the index, what will spur this kind of move? The first possibility is simply the recent rise in consumer confidence. The consumer confidence survey may seem arbitrary, but it can definitely be the spark that ignites the surge of the Dow Jones.

There will not be another report for a few weeks, but investors may in fact feel that any dip in an equity's share price is a reason to buy. And since the Dow Jones is composed of 30 top companies, the index will rise substantially. This scenario will happen if there are not any negative market moving news or rumors.

On the other hand, the bears certainly have plenty of munitions to bring the Dow Jones down. The first is Europe. It may sound like a never ending saga to mention Europe, but the European Union is far from being in the clear. The economic problems that persist are cyclical in nature, and will end at some point. Unfortunately, this end could be anywhere from a year to several years away. Therefore, public equities markets will be weighed down until the problems are resolved.

Another macroeconomic issue is China. We may see a hard landing in China as opposed to the soft landing some are expecting after China's GDP estimate for 2012 was revised substantially lower and inflation was guided higher. These numbers should not come as a surprise because China's economy has been showing signs of an impending slowdown for almost a year now. However, if China cannot steer clear of a disaster, equities will have more weight holding share prices down. Hence, the Dow Jones will not be able to sustain the 13,000 level. We saw the impacts of China on Monday's market as the economic data held the majority of equities back.

Another bearish event going for the Dow Jones is the coming stress tests. The report should be published some time this month, and according to a report released Monday, it appears the results may be worse than we expected. Keep in mind this is only speculation but it should be concerning to investors that a group of major banks are worried the report could spook the financial markets. In other words, it appears at least a few of the major banks will likely fail the stress tests.

Even though Monday was a red day for the Dow Jones, there are signs that the index wants to bounce higher. After a slight increase during the first half hour of Monday, the Dow Jones plummeted almost 100 points in less than 25 minutes. However, most importantly, after the 12,883 bottom, bulls sent the Dow Jones back into the upper 12,900s. This indicates that investors and traders feel that the closer the Dow gets to 12,900 (our current floor) the better time it is to buy equities.

However, investors and both long and short traders need to be careful because March has plenty of market shifting events that could potentially send the Dow Jones substantially above 13,000 or below 12,900. The stress tests are a bullish and bearish event, because if the report is more positive than anticipated, then investors will rejoice. Of course, it is difficult to anticipate something that is a complete unknown. On the other hand, bears appear to have news and rumors on their side, and could potentially bring the Dow Jones back to early-mid January 2012 levels by the end of March.

As you can see, the Dow Jones is at a tipping point. The index is currently sitting at a point where any bit of good news will send the index well over 13,000, but any sign of weakness will send the Dow lower. Keep in mind that the market is acting bullishly, and it will take severe weakness before bulls will give in. The stress tests could be the ammunition for bears to send the market lower, but if American jobs and housing continue to improve, bulls will pull the market up.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.