Where is DJIA heading?

Today the Dow Jones industrial average (DJIA) saw its lowest opening in about 12 years. The trigger was provided by the biggest corporate lost posted by AIG and its subsequent restructuring plan. The sub-7000 levels on DJIA were last seen only in October 28, 1997. Although the blue-chip index has fallen by half from its peak of 14000 reached in October 2007, yet the bottom seems to be further down. It has seen sharp fall since it broke the 8000 level which was considered a major support. From the pure technical analysis, the next support (from the historical prices) comes at around 6800, and today mid-day (March 2, 2009) DJIA is close to that level. If this support level breaks, technicals will suggest DJIA to stabilize at around 5800-6000 levels.

Source: Google Finance
However how appropriate is it to apply purely technical analysis to this kind of situation. Never before corporate have run into such massive losses. Never before century old organizations like Bear Stearns, Lehman Brothers and Merrill Lynch collapsed simultaneously. While US has seen several recession phases in the past, the depth of the current recession is considered by many as comparable to “The Great Depression”. The GDP (gross domestic product) in the United States dropped at an annualized rate of 6.2 % in the last quarter of 2008. This is the steepest fall since the 1982 recession.

Another major worry for investors was Berkshire’s chairman Warren Buffett's annual chairman's letter, in which he talked about the tough 2008 his Berkshire Hathaway company experienced. He admitted that he "did some dumb things in investments" during the year. Notably earlier many investors had been following Mr Buffett in these tough times and his investment in stock market had kept many investors invested in market. With Buffett giving signals of a much bigger problem, faith of many investors will be lost from stock-market.

With the ailing financial system and fear of a long recession, pessimism is the dominant theme. Investors are looking for some clue that the situation is stabilizing and so far not much has come to their way. In such a scenario decline of the blue chip stocks can pull the index further down and a sub 6000-6500 levels can be witnessed in coming months.


DJIA is a price weighted average of top 30 companies in US. As on March 1, 2009 the weights of the stocks in DJI were:

SN	Stock	% Weight
1	IBM	10.4
2	Exxon	7.7
3	Chevron	6.8
4	McDonalds	5.9
5	Johnson & Johnson	5.6
6	Wal Mart	5.5
7	Procter & Gamble	5.4
8	3M	5.1
9	Coca-Cola	4.6
10	United Technologies	4.6
11	Boeing	3.5
12	Hewlett Packard	3.3
13	Verizon Communications	3.2
14	Caterpillar	2.7
15	Merck	2.7
16	AT&T	2.7
17	JPMorgan Chase	2.6
18	Kraft Foods	2.6
19	Home Depot	2.4
20	Dupont	2.1
21	Disney	1.8
22	Microsoft	1.8
23	Intel	1.4
24	Pfizer	1.4
25	American Express	1.4
26	General Electric	0.9
27	Alcoa	0.7
28	Bank of America	0.4
29	General Motors	0.2
30	Citigroup	0.1