Technical Analysis: The Dow Nears Major Support
The Dow is coming up on a critical test of the health of the U.S. financial system.
September 15, 2008
By Paul Shread
internetnews.com
The bears showed today that they have plenty of growl left, sending the Dow and S&P to new closing lows and the stock market to its fifth 90% downside volume day since June. This heavy selling will eventually help the market form a major bottom — but we need a 90% upside day for a signal that the process is complete, otherwise the risk remains to the downside.
We are coming up on very important support in the 10,670-10,827 area on the Dow (first chart below), the index's 2006 lows (and early 2004 peak).
Why is this level so important? We will restate our long-running observation on the importance of mid-term election year lows. Since 1934 (basis the Dow), they've held until the next mid-term low four years later, and if broken decisively, broken only at the end of the next four-year cycle low (1974, 2002). 1947-1949 saw multiple tests and even a breach or two of the 1946 low, but it essentially held.
The last time a mid-term year failed to hold up was 1930, a bit of history we sure don't want to repeat.
The phenomenon likely has to do with the effectiveness of monetary policy — if efforts to stimulate the economy in the two years leading up to the presidential election are effective, then the lows of the weakest part of the cycle should hold.
We're sure testing both the effectiveness of monetary policy and the strength of that mid-term low here.
The S&P (second chart) has already taken out the 2006 low; next up is 1155-1163, the early 2004 peak. To the upside, 1220 and 1230-1237 are resistance on the S&P, and 11,081-11,261 on the Dow.
The Nasdaq (third chart) has support at 2155-2167 and 2100, and 2200, 2225 and 2245 are resistance.
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Stocks Plummet on Historic Wall Street Shakeup
In a single day, half of Wall Street's major independent brokers disappeared — along with a whole lot of stock market capitalization.
September 15, 2008
By Paul Shread
internetnews.com
Stocks plunged Monday after U.S. government officials let Lehman Brothers (NYSE: LEH) fail rather than stage another financial rescue, and Merrill Lynch (NYSE: ML) agreed to be acquired by Bank of America (NYSE: BAC).
The weekend's historic shakeup left just two major Wall Street firms standing — Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) — after a 14-month credit crisis that is shaping up to be the worst in decades for U.S. financial markets. It also left the major stock averages with their worst one-day decline since the aftermath of the Sept. 11, 2001 terrorist attacks.
And it's not over yet, as insurance giant AIG (NYSE: AIG) is rushing to find funding before it follows suit. No Dow stock has ever filed for bankruptcy in the index's 111-year history; AIG could be the first if the company can't boost its financial reserves quickly, and the financial repercussions could make Lehman's pale in comparison.
Even if AIG can find funding — and it has enough valuable holdings so that remains a possibility — the weekend's financial market disruption and continued weakness in the housing market will likely set off another round of write-downs and capital raising by financial firms. Indeed, some on Wall Street are calling for suspension of year-old "mark-to-market rules" that require unrealized losses to be accounted for at a fair market value, at least until financial markets stabilize.
It will also take time to unwind Lehman's derivatives positions, which has set off a scramble for liquidity that led to $70 billion in collateralized loans, or "repos", from the Federal Reserve today. An AIG bankruptcy would compound those problems.
The biggest question remains how hard the turmoil will hit the real economy, which has already been showing signs of a sharp slowdown in recent weeks. If the Wall Street shakeout curtails lending and credit markets even further, the economy could feel the effects for some time to come.
The turmoil hit the tech sector hard, with the Nasdaq falling 3.6% on the day.
Take-Two (NASDAQ: TTWO) lost a quarter of its value after Electronic Arts (NASDAQ: ERTS) dropped plans to buy the company |
