The battle for 12,850 continues!
We're writing this article on Wednesday, 21 November 2007 at 11am. By the time you're reading this article the battle for 12,850 on the Dow might be over. Once this last line of defence gives way the levees may fall.
So what's so important about 12,850?
12,850 marks the closing low on the Dow during last Augusts' swoon. A break below this level would probably cause further selling. How much more?
Chart 1 - Dow Monthly chart; Yen (bottom)
As mentioned above, at the time of this writing the market is weak and it looks as if resistance may fall. This is not to say a White Knight won't magically enter the picture at the close (as often happens) and save the day. But let's assume for now that resistance does fall. Is it the end of the world?
The above chart shows how influential the Yen Carry Trade has been in the stock market. The Yen (bottom) has been rallying since July and has caused all sorts of problems for the Dow. The Yen has recently burst out of a long basing pattern (green line) and has painted a target of around 100. Therefore, if the immediate past is any indication, a 10% rise in the Yen could see the Dow shave off roughly the same and fall to approximately 11,600 (which is a Fibonacci resistance level).
Incidentally 11,600 is approximately the year 2000 top on the Dow. That level was breached in early 2006 and has never been retested - looks like it will now.
Some Positive Signs emerging out of the Gloom:
The market has been led lower by a slew of bad news from the financials. Not a day goes by where some institution isn't disclosing the extent of their write-downs.
This incessant selling has caused the banking index to already retest its 2006 breakout levels.
Chart 2 - Banking Index retests breakout; Banking Index vs. Dow bellow
Of interest is the relative weakness in Banks vs. the Dow (bottom). The ratio is approaching stiff multi year resistance and is likely to be repelled lower, indicating in both relative and absolute terms that the fall in the Banking index may be close to over. That would be good for the overall market as banks have been the epicentre of economic woes.
What's the Fed's response?
Will the Fed allow the markets to deflate without a fight?
Based on their recent propensity to reduce interest rates we'd have to say a loud No!
Thus we have to conclude, whether successful or not, the Fed will go on an all out offensive and print money till the Cows come home. Long-term this can only benefit Gold and Commodity investments.
NEWS FLASH: Dow got hammered at the close finishing at 12,797 and below critical support. Looks like its time for those 100 Dollar Bill drops Mr. Bernanke.
More commentary and stock picks follow for subscribers...