|On February 17, 2009, the Dow Jones Industrial Average (DJIA) dropped almost 300 points to close at 7552. This close brings the DJIA within points of breaking the November 2008 lows. With any follow-through to the downside, the DJIA would trade at its lowest levels since 2002 when it reached a low of 7197.|
|Before breaking below 7200, the bears will have to break through significant support. As noted, it is the bottom of the 2000–02 bear market. Further, 7119 is the 50% Fibonacci retracement level from the lows of the Great Depression to the November 2007 market peak.|
|Since we are in the strong grip of a major bear market, I think it is almost inevitable that we will reach and, in the not-too-distant future, break below the 7200 level. Should that forecast come to fruition, where is the next major support level? We can use Fibonacci analysis to develop guidelines for where the market may be headed.|
|FIGURE 1: FIBONACCI TARGET LEVELS. Here are clustered Fibonacci support levels.|
|Graphic provided by: Excel.|
|On Figure 1, you can see the major highs and lows of significant time periods for the DJIA — for example, the market bottom of 1987 and the market top in 2007. In this case, 61.8% of the difference between these market extremes leads to a price target of 6422. For the three examples noted, the average is 6369. This is not a hard and fast number, but if and when the DJIA approaches this level, it would be prudent to look to cover short positions and consider establishing long ones.|
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