Dow Down 400 Points - Here's Why in 3 Letters

iSPYETF

Explaining the Dow's decline in three letters is actually easier than you think?

In fact, partially based on those three letters, we anticipated the Dow's decline via this November 21 article: Biggest Dow Jones Component Hits Speed Bump.

Which 3-letter company is the Dow’s biggest opponent? By now you probably guessed the answer to today’s riddle: IBM.

To be completely accurate, the addition of Visa actually demoted IBM to the second most important stock of the Dow Jones Average (^DJI) and the Dow Diamonds ETF (DIA).

IBM accounts for 7.10% of the Dow Diamonds ETF and Dow Jones, Visa for 8.33%. Prior to the Dow Jones component reshuffle, IBM singlehandedly made up 9.43% of the Dow Jones (Chevron was a distant second with 6.22%).

So what happened to IBM?

Around November 21 IBM hit major technical resistance, illustrated by the chart below. The IBM chart is an updated version of the one featured in the November 21 article (the gray box highlights the performance since November 21).

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IBM is not the all-important Dow bellwether it used to be, but when one of the Dow's MVPs hits a speed bump, the Dow tends to suffer.

So we’ve seen that technical resistance isn’t just financial mumbo-jumbo.

More important than resistance for IBM was the technical resistance for the Dow Jones itself.

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The December 1 Profit Radar Report published this long-term chart of the Dow Jones. The trend line resistance at 16,150 is clearly visible.

Based on this 13-year long trend line, excessive optimism and waning market breadth, the November 27 Profit Radar Report recommended to go short the Dow Jones at 16,100 and to close our November S&P 500 ETF (SPY) long position at 1,810.

What's next? A near-term forecast for the Dow Jones and S&P 500 is available here:

Short-term Dow Jones and S&P 500 Forecast with a Twist

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades. At times Simon takes a look at major index components (such as IBM or Apple) to get a better read on the overall market.



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