Thursday, October 19, 2006
Dow Stretches for 12000 but what do these numbers mean?
Dow stretches for 12000 but what do these numbers mean?
The Dow Jones Industrial Average or DJIA for the duration of this article is the oldest index for the New York Stock exchange (also NYSE for the duration of this article.) The DJIA is comprised of 30 stocks (see below for list of stocks) which are some of the most known stocks in the world.
The DJIA also crossed a very important number, 12000, this week. It was the first time it has closed above the figure. But what do these numbers really mean? 12000 is just as important as 12980.93 right? WRONG!
Let’s put this in perspective. You and I both like to keep things simple. When we sell things at a garage sale or anything where calculations will be taken without sales tax or even without calculators we like to keep the numbers well rounded. I won’t be selling my grandma’s plates for $.99 or $1.01 each, I’ll probably round it to $1 to keep my work of adding and making change simple. Traders think in the same fashion as well. We like to make it simple and well rounded, while some more than others, we can all agree that using even numbers makes our life easier.
So what does this have to do with trading? I’ll explain. Stocks move because one person or many people have entered higher or lower asking prices than the current price and another person accepted it. If AB Company is $5 a share and I ask $5.50 for my shares and another person accepts, the new price is $5.50 per share. Prices aren’t dictated by how much a company makes or how well its new product is doing. A company is worth only what someone is willing to pay for it, or at least a share of it.
When I want to sell or buy a stock I usually don’t enter an order at $25.95 unless that too is a very important level. I’ll probably just enter it as $26 even. This is what people have done with the DJIA. Those who were holding the DJIA futures probably had sell orders in set to sell when the DJIA reached 12000. In order for the Dow to move above 12000 it was going to have to take a lot of pushing from people who had sell orders at or around 12000. When a stock, index, or equity moves through an important level such as 12000 it takes out a lot of downward positions. Those who had sell orders at 12000 were bought out by the buying strength and can no longer insert new sell positions at 12000.
Just a few days ago the DJIA moved above 12000 but was shot back down into the 11000s. This is due to the amount of sells set at 12000. The movement through 12000 the first time severely weakened the line at 12000 and made it even easier to break through this time. This is known as traders remorse, when a stock moves above a level only to be corrected then goes back to that very level.
Now that the DJIA is above 12000 it should be harder for it to fall below it again simply because traders have probably issued buy orders at 12000. But if it does fall through it will make a sharp move down because there are probably sell orders placed below 12000.
Companies in DJIA.
3M Company (MMM) Alcoa Inc. (AA)
Altria Group, Inc. (MO) American Express Co. (AXP)
American Int’l. Group (AIG) AT&T Inc (T)
Boeing Co. (BA) Caterpillar, Inc. (CAT)
Citigroup Inc. (C) Coca-Cola Co. (KO)
DuPont (DD) Exxon Mobil Corp. (XOM)
General Electric Co. (GE) General Motors (GM)
Hewlett-Packard Co. (HPQ) Home Depot, Inc. (HD)
Honeywell Int’l. Inc. (HON) Intel Corp. (INTC)
International Bus. Mach. (IBM) J.P. Morgan Chase & Co. (JPM) Johnson & Johnson (JNJ) McDonalds Corp. (MCD)
Merck & Co. Inc. (MRK) Microsoft Corp. (MSFT)
Pfizer Inc. (PFE) Procter & Gamble Co. (PG)
United Technologies Corp. (UTX) Verizon Communications Inc. (VZ)
Wal-Mart Stores, Inc. (WMT) Walt Disney Co. (DIS)