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Searching For Support

Posted: Feb 09, 2009 11:24 AM by Gregory S. Davis

Tickers in this Article: DIA, SPY, QQQQ, ONEQ, AAPL, DELL

Individuals and professional investors often wonder how to spot the bottom of a falling stock or index. One method investors can use is identifying support levels. Basically a support level is a target price below which a stock or index appears to not fall below. Let's take a look at how the Dow Jones Industrial Average (DJIA) and other large composites have responded over the last few months as an indicator.

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Dow Support
Over the previous three months going back to the beginning of November last year the DJIA has closed below 8,000 five times with the most recent occurrence on February 4, 2009. An investor could consider 8,000 to be a bottom given that shortly after each descent below the mark the DJIA hasn't continued to fall much lower despite the barrage of news highlighting layoffs and rising unemployment numbers. Individual investors can follow the performance of the DJIA by following the Diamonds Trust, Series 1 ETF (NYSE:DIA). In similar fashion DIA has fallen below $80 four times over the same time period. DIA allows investors to invest in an index designed to replicate the returns of the DJIA. Additional bonus rewards for choosing DIA are its low 0.14% expense ratio and its 3.67% yield. (To learn more about reducing your expense ratios, read Stop Paying High Mutual Fund Fees.)

S&P 500 Support
Investors interested in taking a broader approach to the market may have an interest in the S&P 500. Over the past three months going back to the beginning of November last year the S&P 500 Index appears to stay afloat above 800. The S&P 500 index has actually closed below the 800 mark once during the time frame given, dropping to 752 on November 20, 2008. For individual investors the SPDRs S&P 500 ETF (NYSE:SPY) offers the opportunity to invest in the performance of the broad index. The SPY ETF has only closed below $80 twice during the same time period on November 20 and 21, 2008. An investment in SPY also offers an extremely low 0.08% expense ratio and a 3.29% yield.

Tech Support
When considering technology, investors may turn to the tech heavy Nasdaq Composite full of familiar names like Apple (NASDAQ:AAPL) and Dell (NASDAQ:DELL). The Nasdaq appears to be treading comfortably above the 1400 mark having only fallen below it on three consecutive days from November 19-21, 2008. For individuals the Fidelity Nasdaq Composite Index Tracking (Nasdaq:ONEQ) does offer the opportunity to track the entire index, but an alternative option with a lower expense ratio of 0.20% is the PowerShares QQQ (Nasdaq:QQQQ), which tracks the Nasdaq 100 comprised of large non-financials.

Final Thoughts
Support levels are just that, until they are broken or until they act as springboards for the upward ascent of the indices mentioned. Guessing the bottom of any market is nearly impossible, but a dollar-cost averaging (DCA) approach to investing can make it easy.

By Gregory S. Davis

Gregory S. Davis is the owner of G. Davis Capital, a Registered Investment Advisor with the state of North Carolina dedicated to providing independent investment research and education. His core methodology for choosing investments includes going against emotion eliciting headlines while focusing on asset diversification. G. Davis Capital also publishes the ETF education website, ETFReady.com . Gregory is a graduate of the Wharton School of Business and he has received an MBA from Bowie State University.

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