How Important Are Resistance Levels

Mark Hulbert writes that the Wilshire 5000 Total Return Index (^DWCT) is closing in on its all-time high of 47.84098 and wonders about the psychological impact:

Yet I don’t know of any advisers who are focusing on the 47.84098 level. So it’s hard to see how it is a psychological barrier for the market.

Ahem…just for the record, I’ve written about the pending new high here, here and here.
But there is the question of how seriously the market takes resistance levels. I don’t have much faith in technical analysis, but that’s not because the market doesn’t think it’s unimportant. Resistance levels clearly play a role. The Wilshire 5000 Total Return Index came oh so close to a new high before backing away.
The Dow flirted with 1,000 six years before it finally broke through. The NASDAQ didn’t fall apart until it jumped above 5,000, which was also half of the Dow.
But Hulbert is right, the market can’t be watching the Wilshire Total Return, can it? The thing about financial markets is that they’re smarter than we realize. There’s a reason to what happens, even if we may not recognize it.
For example, there’s a fascinating correlation between the progress of the Smoot-Hawley tariff bill through Congress in 1929 and the reaction of the stock market. But at the time, the financial media wasn’t at all focused on this disastrous tariff bill.
The stock is a collection of millions of participants, and collectively it has almost a magic eye that’s focused on certain events. Even though no one (well, almost no one) has been talking about the Wilshire 5000 Total Return Index doesn’t mean the market is ignoring it.

Posted by on September 7th, 2006 at 12:07 pm


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