Markets Look Set Up for an Ugly Fall

The quick and the dirty of it: The markets (DJIA, S&P500, NASDAQ) are setting up for an ugly fall and investors are sensing it. The growing indigestion is pointing straight toward the support line of 11,635 for the DJIA. This particular point is a problem as there is no support shown during the past 2 years until it reaches 10,683. Also, a simple Fibonacci retracement (blue horizontal lines) shows that the DJIA has stayed close to the retracement points rather consistently.

That said, unless we see intervention that is decisive and convincing by the Fed, a breakdown is inevitable. Earnings, news and recent policy has not done anything to support the averages. This time, we need to see a full-court press that is a unified effort between monetary policy and government initiatives. Anything less that a miraculous plan pulled from Lincoln’s hat will be met with negativity.

A 75bps cut at the March 18 meeting has already been price in…it is hard to see what is going to change sentiment and direction over the near term. Click to enlarge:

Comments

[Deef]

Down a 1000 points? That's 10%! Are you talking short term or mid term?

[Reinko]

To Deef: Short term of course because mid & long term about 4500 DOW points need to go to reach normal P/E ratio's.

Lets not forget that total future loss of housing value could reach over 10 trillion and that detail is completely not priced into the markets yet. A few months ago total housing value was 23 trillion and it could very well be that in the future it will draw back to 13 trillion or even lower.

That is just a matter of elementary math...

[Tony Soprano]

Ugly fall you say and other bears are saying: fear is fueling more fear, no end in sight for subprime woes, margin calls, too much dedt, the economy sucks, real estate bust, commercial is the other shoe to drop, states in trouble, computer security pressing, commodities sky rocket, dems fighting dems and finally OUR WATER IS CONTAMINATED. Whee! But what happened to the bird flu, Avian influenza virus? Can we bring that one back?

I know you are a technician but we cannot escape the fundamentals. (The Fed has just intervened with much more liquidity you better recant) I have been in the market for over 45 years and this is by far the most predicted recession ever. I am bullish.

[AndrewHorowitz]

TONY!!

If you read past the article title, you would have seen the line that said: That said, unless we see intervention that is decisive and convincing by the Fed, a breakdown is inevitable. Earnings, news and recent policy has not done anything to support the averages. This time, we need to see a full-court press that is a unified effort between monetary policy and government initiatives. Anything less that a miraculous plan pulled from Lincoln’s hat will be met with negativity.

HELLO! People start reading the text, not the headline only!!!!!!

[Tony Soprano]

Then please reflect a better headline to represent your text!

A better headline would have been: "Big Intervention Needed To Stop Ugly Fall". That would have been a home run. Although, your time was impeccable.

[sammyg123]

Who cares what his headline is. Look at the technical analysis he did. It's very good. He's also right. What, do you think his choice of headlines is going to change the markets? It's just an analysis, and a damn good one at that. Silly bulls, the fundamentals aren't good right now. That's why the market sold off. Fundamentals change, of course, so you'll have your day. Take your frustration out on those who caused the financial crisis, like quants and their derivatives ponzi scheme that has brought our financial system to the brink, endangering the savings of even those who have nothing to do with the investment markets. You want to get angry, you want fundamentals - then write a letter to congress and make sure they allow the free market to fix their problem, and to get the heck out of the way. Now, there's a good reason to get your blood pressure up.

[User 162705]

With the S&P PE at 14.28 and "normal" PE 12 isn't 20% or about 2400 points the needed correction?

[gridflash]

Interesting analysis. But I'm not sure the current credibility crisis in the financial markets is something that the FED has the tools to solve.
We got a great pop this morning but many investors have been waiting for this opportunity to sell. And the current thinking is that now the FED will not need to deliver .75 basis points on the 18th, which is causing a bit of a selloff as I type this. I also note that none of the attempted rallies today has reached this mornings peak.
Remember this only a 28 day solution.

[Tony Soprano]

Mr. sammyg123

I was not critical of his chartist point of view. I'm in a position to take advantage of another leg down if it does happen.

You miss the point. Mr Andrew Horowitz pointed out to me about his caveat in his text that the Fed needed to be "decisive and convincing". But his headline said something else to me.

My first posting was that there are plenty of negative headlines to become bullish. I'm having fun and I don't stoop to do the personal attacks. I'm merely discussing the data at hand. Finally, headlines do matter whether we like them or not. We can be critical without being personal.

[Malkiel]

The last time we had a president as do-nothing as Bush it was Hoover, who allowed the market to crash. The market and Main Street have already concluded that Bush and the Republican-obstructed Democratic Congress is incapable of putting together a focused effort to save the economy, so the only identifiable change in news could come in November, when the election changes the tone. Until then, we are psychologically set up for an overcorrection,--my guess would be at least one inter-day collapse below 10,000...

[chagrinned1]

I have been thinking and saying this for some time. The psychology of the markets needs change. Daily feedings of negative news in the markets begets negative results. Rick

[wanstek]

Well now that the DOW is up around 300 points today I guess that Fibonaccci line is just a little farther away!

[Dana Cole]

To quote my own post to a very similar article on another website:

Thank you for the interesting article, but I have come to the conclusion that in connection with the stock market, which is subject to the influence of billions of people:

THERE IS NO WAY TO PREDICT WITH ANY RELIABLE ACCURACY WHAT WILL HAPPEN TOMORROW BASED ON WHAT HAPPENED IN THE PAST.

If someone can convince me otherwise, please cite the evidence. I am more than willing to be wrong.

All charts do is tell you where the market HAS BEEN and where it is NOW. Trying to predict which way it is headed based on chart patterns is like trying to predict which way a flock of birds is going to fly based on where they flew ten minutes ago.

In late January the 10-20-30 day trend lines of TMA were screaming "Buy!" For a little lesson on making a trade based on trend lines, take a look at that chart now.

(My sympathies to those who bought TMA. I have made the same mistake more than once, which is why I am posting this comment.)

In the same way, in late January the 10-20-30 day trend lines on AA spelled doom for the stock. To see what actually happened, check out the chart now.

Anticipating breaks in trend lines - even long-term trend lines - is dangerous because the time when a break appears imminent (or, in other words, as charts looked TODAY) is exactly the time when stocks have become cheapest relative to where they have been. The longer the trend line, the cheaper they are.

Does that mean that charts should not be used? Of course not! They are the only really effective visual ways we have of determining what has happened and where we are now. And to the extent that up and down patterns DO tend to repeat themselves over time, they are highly useful in GUESSING were things are going. It is still just a guess, though.

We must always remember that no stock ever obeyed the dictates of a chart. Just because I draw a line under a price does not mean that that price will not be violated - NOR does it mean that it is at risk of being violated. It is only a line on a chart and that is all.

I'm only trying to save someone some time and a little money here. In the past I would have been grateful if someone had done it for me.

[helplessobserver]

It has been my experience that markets follow price trends. The overall trend is depicted by the S&P 200 day moving average. A shorter important trend line is the 50 day moving average. Stocks falling below the 50 day line do not do so by gravity and something that is mostly non public information may have occurred. Investors who ignore this signal do so at their capital's peril. Currently the 200 day line is declining so caution is the watchword for the longs.