Dow Jones Band of Long Term Horizontal Resistance

The Dow Jones Industrial Average has spent the majority of the past 10 years gyrating near the 10,000 level. In fact, as of February 09, 2010, the Dow is actually down about 6% compared to its closing price a decade ago. The trading band from 10,000 to 11,000 on the Dow has been so significant that price spent 4 of the past 10 years bouncing between these levels. This trading range has created a ton of price memory that will keep the markets from moving higher for a long time.

10 Year Chart of the Dow Jones

In 2008, the Dow collapsed through this trading band, and moved all the way down to the 6,500 level before reversing. After staging a huge rally in 2009, the Dow has finally made its way back to this important trading band. It managed to bust through the 10,000 level a few months ago and has fluctuated in this band ever since. It's very typical for strong rallies to temporarily move above strong horizontal resistance levels before collapsing lower. This initial push into the trading band will fail and the stock market will head lower as 2010 progresses.

Psychologically, this trading band has become very significant to investors. Considering the Dow has traded in this range for 4 of the past 10 years, it has created a lot of price memory. For example, consider the investors who bought stocks in 2004 and 2005 when the Dow was trading in this band. Now that the Dow is back to these levels, they are just happy to sell their positions at near break-even levels after the recent plunge that the market saw in 2008. This will create a lot of selling pressure that will inevitably cause the Dow to sink lower until demand returns at much lower levels.

In January of 2010, the Dow finally broke down out of a huge rising wedge pattern that had been forming for the majority of 2009. The target price of this pattern measures to at least the 9,100 level. Once this target price is met, the Dow will have an extremely tough time moving back into the 10,000-11,000 trading band. This overhead long term resistance will prove to be too much to overcome, and the stock market will put in a negative return for the 2010 year.