Sterling Market Commentary for October 4th, 2011

A Look at Monday’s Market Activity:  The overall market sold off sharply yesterday in a broad based move that saw every sector index I track move lower on the day.  The weakest sectors of the market were the Airlines, Broker/Dealers, Banking, High Tech, Biotech, Commodities, Oil Services, Natural Gas, Transports, Cyclicals, Oil & Gas, Insurance,  and Commodities related indices.  The Dow Jones Industrial Average was lower by 258 points.  Among the Dow components,  Bank of America ‘BAC’ was down almost 10%, followed by Alcoa ‘AA’ with a 7% decline, and Caterpillar with a 4.7% decline.  The only Dow component to finish the day higher was Wal-Mart ‘WMT’ which posted a whopping $0.06 per share gain on the day.  Oil was lower by $1.59 to $77.61 per barrel, and Gold was higher by $4.90 to $1,620.40 per ounce.  In the Grain markets, Wheat was higher by $0.102 to $6.194 per bushel, and Corn was unchanged at $5.924 per bushel, while Soybeans were lower by $0.014 to $11.774 per bushel.

A Few Thoughts Before the Open:  In looking at the charts from yesterday’s trading activity I noticed the following:

1.  The Dow Jones Industrial Average closed down 258.07 points at 10,665.30  In the process the Dow Jones Industrial Average broker support at 10,719.94  In looking at a chart of the Dow,  which I have posted below,  it looks like the Dow has a converging triangle pattern forming.  These patterns are typically very predictable.  The index or stock in such a pattern will generally consolidate as it moves towards the corner of the pattern and then brake sharply in one direction or another.  In the case of the Dow chart below, it may take a couple of days to determine in this is the break or not, I think it is and it is a break to the downside.  Time will tell, but I see nothing to indicate a move higher.  Additionally with the Dow breaking support at 10,719.94 our next level of support on the Dow is at 10,415.54  If that level fails to hold then we are looking support at the post “Flash Crash” levels of 9,686.48 on a closing basis.

2.  A long time friend of mine, who is a stock broker I have a great deal of respect for, called yesterday and asked about the market.  Our conversation focused on the Dow Jones Industrial Average which I consider to be the leader which all other sectors follow.  Our discussion centered on downside support for the Dow.  I stated that I saw support and 10,415.54 and then at 9,686.48 basically the post “Flash Crash” support levels.  When asked what happens if we break support at 9,6848.48;  I looked at the chart during the spring of 2009 and came up with the following support levels.  I see some reasonably solid downside support in 8,700 range, a little bit at the 8,000 level; and then its a sharp drop to 6,600 on the Dow.  Does this mean I think the Dow is definitely headed towards 6,600?  No.  But I do not see support with any real solidity until the 8,700 level on the Dow.  Does this mean I think the Dow could go to 8,700?  Yes,  I think there is a good chance we could see 8,700 on the Dow Jones Industrial Average by the end of this year.

In looking at the indices I track, I have the following updates on support and resistance:

Dow Jones Industrial Average:  The Dow Jones Industrials closed at 10,655.30  I currently see upside resistance on the Dow at 10,719.94 and downside support at 10,415.54 on a closing basis.    If support fails to hold at 10,415.54 and then I see the next level of support coming in at 9,684.48 on a closing basis.

S&P 500 ‘SPX’:  The S&P 500 closed at 1,099.23  I see upside resistance on the S&P 500 at 1,127.79 and downside support at 1,096.48 on a closing basis.  If support fails to hold at that level, then I see the next level of support coming into play at 1,064.59

NASDAQ 100 Index ‘NDX’:  The NASDAQ 100 closed at 2,085.04  I now see upside resistance on the NDX at 2,192.96 and downside support at 2,038.22 I see the NASDAQ 100 continuing to move lower and testing support at 2,038.22 on a closing basis.  If support fails to hold at that level, then I see the next point of downside support beingat 1,975.33 on a closing basis.

The Dow Jones Transportation Average:  The Dow Transports closed at 4,038.73    I now see upside resistance on the Dow Transports at 4,082.51 and downside support level  at 3,906.23 on a closing basis.

M.S. Commodities Related Equity Index ‘CRX’:  The Morgan Stanley Commodities Related Index ‘CRX’ closed at 735.98.   I now see upside resistance on the ‘CRX’ at 824.91 and downside support at 684.90

S&P Banking Index ‘BIX’:  The ‘BIX’ closed 113.16.  I see upside resistance on the ‘BIX’ at 120.71 and downside support at 100.96 on a closing basis.

Amex Broker/Dealer Index ‘XBD’:  The ‘XBD’ closed at 75.95   I see upside resistance at 80.87 and downside support at 80.87 on a closing basis. I am expecting the ‘XBD” to continue to move lower and test 63.48  on a closing basis.

S&P Insurance Index ‘IUX’:  The ‘IUX’ closed at 147.73 I see upside resistance on the ‘IUX’ at 175.13 and downside support at 143.80 on a closing basis.  I am currently expecting the ‘IUX’ to continue to move lower and test 143.80 on a closing basis. If the S&P Insurance Index ‘IUX’ closes below 143.80, then I expect the ‘IUX’ to continue to move lower and test 120.07 on a closing basis.

Amex Gold & Silver Index:  The Amex Gold & Silver Index ‘XAU’ closed at 182.98  I see upside resistance on the ‘XAU’ at 208.47 and downside support at 177.39

Amex Oil & Gas Index:  The Amex Oil & Gas Index closed at 995.22   I currently see upside resistance on the ‘XOI’ at 1,029.20 on a closing basis and downside support at 977.58.

M.S. Cyclicals Index:  The M.S. Cyclicals Index ‘CYC’ closed yesterday at 737.63  I currently see upside resistance on the ‘CYC’ at 789.46 and downside support at 710.93  on a closing basis.

M.S. Consumer Index:  The M.S. Consumer Index ‘CMR’ closed at 671.20  I currently see upside resistance on the ‘CMR’ at 691.44. and downside support at 657.87 on a closing basis.

www.sterlinginvestments.com