Dow Again Approaching a Ten-Year Old Support Level at a Key Time

02/17/2009 11:22 am EST

Focus: STOCKS

Since late last year, investors have watched the 8000-point mark on the Dow Jones Industrial Average as a support level. The index has indeed bounced at or near that level a half-dozen times since October, but taking a step backward, history shows the 7500-point level to be a very strong, long-term point of support for the index.

Over the past ten years, the Dow has tested and bounced at the 7500 level many times at key points. As you can see in the chart below, the level has held strong and proven to be a bottom, even after mighty highs. And we're back at that point at present. In fact, if you had started investing in the general market in February of 1998, you would be nearly even today. Considering inflation, you'd have lost money.

But now is a critical time, as the testing of that support level also comes at a time when uncertainty is at a high and government is intervening to "save" the economy. We've got a $787 billion stimulus package about to be signed into law, US Treasury secretary Timothy Geithner unveiled the Treasury's actions, the cost of which could total $2 trillion, unemployment changes are at decade-long highs, and consumer confidence is at decade-long lows.

All of this is happening as we approach a historically reliable support level. We all hope for a bounce, but we will watch very carefully. A break through that support level means we might be in for a protracted downturn, or at the very least, a long consolidation before we see any move up.

Financial planners used to always say that there had never been a ten-year period in the markets that had a negative return. They can no longer say that today. But that's why we are so passionate about learning markets. As investors and consumers like you are more educated, you're better prepared to manage your investments to avoid losing money over ten years. Through diversification, portfolio management, and active participation, you can avoid those major downturns, or at least hedge your risk against them. So take the time required to learn what you need to know so you're not the one wishing you'd just gotten out.

In the meantime, watch 7500 very closely. And learn how to diversify and reduce risk in your investments.

chart

Click here to watch the video.

By Ryan Teeples of LearningMarkets.com.

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