China Lower Again - Where Do We Find Support

Steve Kanaval  |

Day two for equity markets find shares still under pressure, and if you watched final hour action the current trading (6am ET) is a continuation of yesterdays action. Markets rallied back in the final hour as participants felt the sell off was overdone to the downside. So logically, during this morning's trading, that bounce was quickly erased and equilibrium restored.

Markets are slightly lower, but within yesterdays band (range) as China remains the driver for global markets. China pumped in an estimated $20 billion to stabilize its equity and currency markets, which recorded the worst opening day's trade in years in the previous session.

Despite the huge cash injections, Chinese shares listed in Shanghai and Shenzen ended no better than little changed and the yuan fell to a new 4-1/2-year low in offshore trade.

"China's actions are certainly positive at the margin ... but overall the risk is that it is interpreted as a signal of weakness that these ongoing struggles to stabilize the market by the authorities aren't really bearing fruit," Commerzbank strategist, Michael Leister, said.

The question is where do we find support for markets and what levels become important. If we use some simple percentage moves (yesterday we were down near 2% for example) we would find support about 350 Dow points from here. This is a simple calculation that has worked for the Dow 30 for many years.

The important thing to watch is will this support level hold on any pullback. The important part of technical analysis is watching these widely held support levels and pay attention to the market action. If they blow right through them - then we know we have a longer term trend lower. If they bounce from the support level, an ensuing rally can be in the offing. Technicians do not trade mechanically, they stand up and watch at key points in the game to garner clues for longer term trends.

Many market watchers were unprepared for the decline and I always find watching technical support levels is a great way to get my footing when others slip and slide down the frozen road. Markets will slip and slide all over the lot this week and you can throw valuations out the window until things settle down. Volatility will be a big factor during January trading, so keep both feet on the floor

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:



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