Monday, August 22, 2011 9:16 am EDT
DJIA: 10,817.65 S&P 500: 1123.53
Today: Up at the open, with resistance starting at DJIA 11,040 (S&P 500: 1148).
We have reached the downside level I targeted on August 1 (DJIA 10,700 – 10,830 and S&P 500:1150). At that time, I said that a failure of the economy to firm up would call for a drop to DJIA: 9,680 (S&P 500: 1050). So far, there is no evidence that the economy is firming aside from the slight up tick last week by the Leading Economic Indicators, which got “zero” press !
The 9,680 level for the Dow is a 50% retracement of the bull market that started in early March 2009, so that’s really not so unreasonable in light of the European sovereign debt crisis and continued softening in the economy here and abroad. It’s a level that attracted buyers frequently in 2009 and 2010, but it is important to note that levels that attracted buyers in the past are only valid as support levels if conditions don’t change in the interim.
One other thing about the validity of “support levels” is that new negatives can arise abruptly when a stock or the market gets down to that level and the buying that was expected vanishes.
Conclusion: The DJIA 10,700 level is just barely viable. Conditions have worsened here and abroad since it became a “support level,” * suggesting DJIA 9,680 (S&P 500: 1050) is a good possibility in September/October.
All eyes are now on the Fed, which meets in Jackson Hole, Wy, Thursday. With the economic recovery on the verge of slipping into a recession, the Street is hoping Fed Chair Bernanke will introduce new measures in an attempt to reverse the slumping economy, namely QE3.
A year ago, at Jackson Hole, Bernanke hinted at a second round of bond buying (QE2) which was initiated shortly thereafter and resulted in a 30% surge in the DJIA and 37% surge in the Nasdaq Composite.
If so, this would coincide with initiatives the Obama administration will introduce in early September regarding a more aggressive attack on deficit reduction that agreed to on August 2, as well as measures to stimulate the economy and reduce joblessness.
Part of the package would require legislative action and part NOT, suggesting executive orders would be used to by-pass congressional obstruction..
Details are not known at this time, but investors must be aware that a one-two punch by the Fed and administration can help snap the bearish funk plaguing Wall Street and Americans in general.
All this would be coinciding with the end of summer and approaching “Best Six Months” for buying stocks (November – May).
Don’t forget : There has never been a decline in a pre-presidential election year since 1939.
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