Wednesday, November 16, 2011

Flirting with the Dow 12,000 psychological level

Technically, there is nothing magical about the Dow Industrials 12,000 level, but to traders it is "psychologically" important. They will alternate between trying to break down below it or to break out above it. It's all simply a game, with nothing related to economic or business fundamentals at stake. And if one day the market struggles mightily to move an inch in one direction relative to a psychological level, just a day or two later traders can reverse and trivially turn that move back into a comparable if not larger move in the opposite direction.
So, if the Dow closes below 12,000 it is ultimately not a big deal to long-term investors. It is all in the name of volatility and increased trading volume that earns Wall Street a hefty chunk of its profits on transaction fees.


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