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Tue December 14, 2010
Pointing out resistance points
Ever wonder why the stock market rises to a certain level and then pulls back? That’s called a resistance point. Financial commentator Greg Heberlein explains it to KPLU’s Dave Meyer on this week’s Money Matters.
(To listen to this week's Money Matters, click the audio 'play' arrow above)
What's a resistance point?
Greg says a resistance point is generated when a number of investors buy a stock, then see the price tumble. Where they bought it becomes a resistance point.
That’s because every time the market comes back to that point, a significant number of our original buyers vow to sell, and do. It breaks the market momentum, reversing the course of stocks.
A second set of resistance points comes at round numbers. In the first 90 years of the Dow Jones industrial average, getting past 100, 200, 300, etc. became a psychological barrier. Sometimes days, weeks, or months elapsed before investors built enough buying energy to bust through those round numbers.
The most famous, or perhaps infamous, round number was Dow 1,000. One day in February 1966 (the 9th), the Dow cleared 1,000, but it retreated into the 900s before the day’s close. At that point, it was at 995.15. Dejected market players then had to wait more than 6 ½ years, to November 1972 (the 14th), to see the Dow close at a record 1,003.16.
So what’s happened lately?
On Nov. 5, the Dow struck an intra-day high of 11,451.53. That was the highest point in two years. On Dec. 7, barely a month later, the Dow ran up to 11,450.89. So two-thirds of a point from cracking into a new multi-year high, it reversed course and tumbled 90 points before that day’s close. That showed resistance.
What happens next?
Market bulls dust themselves off, reload their guns, and take aim at new highs. A single news event could send it soaring or tumbling. As we’ve seen, no timetable exists – a day, a week, a month, 11 or more years. We just have to wait and see.