Nasdaq could fall 20% more
Sean Silcoff
National Post
Friday, July 12, 2002
MONTREAL - The bad news for North American investors could get a lot worse, with major stock indexes such as the Dow Jones Industrial Average falling as much as 37% before bottoming out, technical markets analysts said yesterday.
Merrill Lynch's technical analysis group said in a report yesterday the S&P 500 and Nasdaq composite index could fall a further 10% to 20%, despite the fact both markets have been more oversold this week than at anytime over the past 20 years.
The London-based research team also said the Dow Jones industrial average could go into freefall if it breaks below the 7914 mark. "This will be the key longer-term support foundation to defend" into the third quarter, the report says. If the index can't find support at that level, it could fall to as low as 5,543 -- 37% drop from yesterday's 8801.53 close.
Roman Franko, a technical analyst with Dundee Securities in Toronto, agrees. "All the major indices are falling through key support levels, and they're all doing it at the same time," he said.
Mr. Franko said buyers flocked into the S&P at the 950 level last September and also in the fall of 1998, marking the index's low point. Now that the index has fallen to that level for a third time, "we seem to be striking out and falling through very important support.
Mr. Franko forecasts the S&P could initially fall to the mid- to high-800 level (compared to yesterday's 927.37 close), at which point it will likely rally back to the 950 "neckline." Below this level, anyone who bought shares over the past four years is in the red. As the index moves to 950, "people will say, 'maybe I should take some money off the table.' "
This will create a situation where sellers flood the market. Buyers could eventually get discouraged and back off, with "sellers chasing the bids lower. That's the really scary part."
Scary because, by Mr. Franko's analysis -- based on a forecasting technique called the "head and shoulders pattern" -- the S&P could hit bottom at 600, or 35% off Wednesday's close.
Mr. Franko is forecasting the Nasdaq could fall below 1,000 (down 27% from yesterday's close) while the S&P/TSX composite -- Canada's benchmark index -- and the Dow could drop by about 23% and 16%, respectively.
However, Clément Gignac, chief economist and strategist with National Bank Financial, sees stocks rallying slightly in the second half of 2002, with the S&P finishing the year at 1050 thanks to stronger profits and productivity numbers, and other indicators the economy is poised to grow.
"I think the fundamentals will prevail," he said. "We are closer to the end of the bear market than at the middle."
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