In last week's edition of the Sterling Weekly I voiced my opposition to all the special interest provisions that were being placed in the financial rescue package being worked on by Congress and urged everyone to write their members of congress to oppose those provisions. Well, things moved too fast for me to be able to write my letter to congress. However since I said I would write my letter and make it available for my readers to see, and for them to send a similar letter to their congress person, I have decided that what I shall do is following the completion of the discussion on the five (5) points that I listed as weighing on the market in the July 21st edition of the Sterling Weekly, I'll put my recommendations in writing in the form of a letter to my congressional representatives and make it available for all to see. That way everyone has the chance to agree or disagree with my thoughts and opinion.
In the July 21st edition of the Sterling Weekly, I commented on five (5) factors that I felt were weighing on the market. They were 1) Political uncertainty, 2) Financial System Weakness, 3) Taxes, 4) Oil Prices, and 5) Dollar Weakness. I've written about weakness in the financial system, the price of oil, and Dollar weakness. Next week I'll take a look at the tax system and its effect on the market. In this week's edition of the Sterling Weekly, I want to take a look at where the market is at in its current downward trend, and where I think support will come into play.
The Dow Jones Industrial Average has fallen 2,563.94 points, or approximately 23% since the close of trading on Friday September 26th. Since setting a new all-time closing high of 14,164.53 on October 9th of last year, the Dow Jones has declined 5,585.34 points or approximately 39%. That is one of the steepest drops I can every remember during my career. So, let's see if we can put this in some perspective. In January of 2000, the Dow Jones Industrial Average closed at an all-time closing high of 11,722.98 and then began a decline brought on by the bursting of the dot.com bubble that took it down to a low of 9,796.03 for a decline of 1,926.95 points or approximately 16.4% before rallying back above the 11,000 level in early April of 2000. In May of 2001, the Dow Jones had climbed back to a high of 11,337.92 before reaching a low of 8,235.81 following the September 11th attacks later that year. That was a decline of 3,102.11 points or approximately 27%. From the September 10th closing level of 9,605.51 to the September 21st low of 8,235.81 we saw a decline of 1,369.70 points or approximately 14.25% in a period of 9 trading days. So if my math is correct we are experiencing of one of the largest and fastest declines in the history of the stock market, and is even greater than the stock market crash of 1987. Which for the record, saw the market peak earlier that year at 2,722.42 and reach a low of 1,738.74 for a peak to trough decline of 983.68 points or approximately 36.1%, and a single day decline of 508 points or approximately 22.6%. Another day or two a declining market and we will be experiencing the greatest market decline since the Great Depression. Now the very serious question of where is there support at comes to bear.
In looking at Dow Jones Industrial Average the market is already fairly over extended and should rally off the next level of support that it is reached. I see downside support at the following levels: 8,521.97, then 8,235.81 then 7,702.34, then 7,524.06, and then 7,286.27 My thoughts are that we would normally see the strongest level of support around the 8,521.97 and 8,235.81 should have relatively equal levels of support and the market could rally from either level. However in my opinion the market appears to be undergoing a crisis of confidence unlike any other that we have seen in a generation or two. In other words, we may a much greater over extension than we are normally used to and as a result normal levels of support may not provide the market turning points that they normally would. So, in a nut shell, I think we'll see support around the 8,900 level, then 8,500, then 8,200 and then 7,500 give or take a 100 points either side of those levels. Where the market finally finds support is anyone's guess at this point (I'll take the lower support levels) however I doubt the market will make a meaningful turn back upwards significantly above any of these support levels.
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