DOW -- Trouble Ahead?
Last Dec/Jan the major US equity markets experienced significant sell offs, and the Dow nearly plunged through 11,600, but support was found, and for the next couple of months the DOW hovered slightly above the 12,000 range... Then came the month of March 08, when Bear Stearns was imploding and bad news started to pour in from every angle.
At that time, I knew the situation was grave and opined that the Plunge Protection Team (PPT) was wide awake at night, trying to find a solution -- otherwise the last leg of confidence in their "Goldilocks" economic charade would fail.
Here's my Sunday Evening, March 16th, 2008 post: Tumultuous Week Ahead
Lo and Behold, within hours of that post, opening markets around the globe began to tumble -- causing the PPT to panic and come out fighting (on a Sunday night)... With their big cannons and guns ablazing, it was announced the Fed would immediately:
Modify the Discount Window -- On March 16, 2008, the Fed further extended the term for borrowing to 90 days, and further reduced the spread to the target federal funds rate to 25 basis points.
Open the Primary Dealer Credit Facility -- The establishment of the PDCF was announced on March 16, 2008. The Board determined that unusual and exigent circumstances existed in financial markets, including a severe lack of liquidity that threatened to impair the functioning of a broad range of markets, and announced that the PDCF will be in place for at least six months and may be extended as conditions warrant.
These two new unparallelled additions would immediately join two other unprecedented actions taken earlier in the year:
- The Term Auction Facility (TAF) in Dec 07
- The Term Securities Lending Facility (TSLF) on March 11, 08
Within days, easy liquidity created through these four new monetary spigots started to calm markets, and as increasing gains were made many shills began to pronounce: "The Credit Crisis is Over".
Well, here we in June 08 and things aren't looking so well again...
With recent reports of:
- The biggest jobless increase in over two decades
- The largest housing bust since the Great Depression
- Oil/gas at an all-time high
- Contagion spreading across the banking sector (significant losses ahead)
- Recent MBIA and AMBAC downgrades
Last Friday's 400 point drop in the DOW should have been a wake-up call.
Let's look at a chart of the DOW:
Note: I'm not a chartist, but I do have a lot of common sense and believe that anyone can relate to/understand what I'm about to say.
Looking at the chart above, last Friday the DOW closed at 12,209. On the assumption more bad news will follow in the days/weeks ahead, where can one expect to see the next level of downside support and will we eventually break through it?
If you follow the chart over to March 2007, you will see that 11,939 is the next downside support level. If we break through there, it's quite likely we will also test the following downside support level-- found in Jan 08 at 11,634. Now, this 11,700-11,600 level will provide very strong downside resistance and the PPT will fight tooth and nail to prevent failure, but if we DO break through it -- look out below as automated sell signals kick in from around the Globe -- potentially creating a selling panic/free-fall.
From there it's a 1,000 point drop to the next downside support level -- July 2006 @ 10,683.
I don't expect to open in a free-fall tomorrow or the next day, but want you to be aware that we're only 300 points from breaking through key downside support levels. Once that happens (which I'm sure it will in the coming weeks) the next support level @ 11,700-11,600 becomes very vulnerable -- and if that one doesn't hold, expect all hell to break loose as the last leg of propped-up confidence in our economy gives way to unknown panic/crisis.
With that said, and expecting more bad news to roll in each and every day, I feel quite confident in stating that both of these downside support levels will eventually be broken (this year), but the real question ultimately relates to timing and the PPT -- What else do they have up their sleeves? No one yet knows, but expect a fight.