As Rick Pendergraft mentioned in Monday’s article, the Dow faced a critical support level at 7197.49. Unfortunately for us, by the time most of you had read Rick’s article that morning, the market had collapsed down below that important mark.

On Monday, the Dow closed at 7114.78

Then Tuesday morning came, and Ben Bernanke assured us all that the recession will end later this year.

The market promptly jumped 230 points yesterday, and shot right back through the 7200 level on the way back up.

Right now, we may just be seeing a snap-back rally, and after a day or two, the slide may resume.

If that happens, and we once again break down below the 7200 level, where do we go next?

That’s a good question. As Rick pointed out, the next level of support is way down at the 4000 level, a 45 percent haircut from where we are now. That means the Dow will have fallen over 60 percent YTD if we hit that mark in 2009.

Yikes.

It also means that the slow trudge back up, whenever that happens, will face yet another resistance level. That means the market will have to work even harder to get back to its’ previous lofty levels.

Needless to say, it was a disappointing day for the market to surrender the 7200 level so easily. It was somewhat encouraging that it bounced right back up through it during the huge rally yesterday.

So here’s how you can play this. If the market does indeed drop back down in the next few trading sessions and re-tests the 7200 level and holds, go long the Diamonds (DIA).

If it falls through the level again, the bears will be in charge and the best way to make money is joining them. As I mentioned last week, you can play the whole market by shorting the Diamonds (DIA). It would have made you a nice gain over the last week.

NULL
NULL