Helene Meisler
Nearly one week after the tragic events in America, I still find it difficult to focus on the market. It's hard to focus on statistics when there has been such an emotional loss. But this is our business, so I've done some work over the weekend.
I've gone back, as it seems nearly everyone has, and looked at previous market shocks. I still feel like anything can happen once the market reopens Monday. But after that opening, here's what the statistics say. The market was set to have reached its maximum oversold reading last Tuesday. As the market hasn't traded since last Monday, the statistics tell the same story they told one week ago: We're still oversold. So now we can add the changed Securities and Exchange Commission regulations with regard to stock buybacks and mutual fund redemptions to the Federal Reserve's easy policy to the oversoldness of the market, and it should find some support after the initial trading burst on the open. I expect we'll open lower, but I don't expect the market to collapse. I think it's safe to say we will see the S&P 500 at new lows, and we can probably throw the Nasdaq into that group as well. With the Dow Jones Industrial Average still trading above its spring lows, a new low for it is still in question. However, I did an exercise with the 30 Dow stocks, plugging in support levels for each and then calculating the Dow average based on those numbers.
The method was simple: Find a good support level or a calculated target for each stock, add the totals and use the Dow divisor (0.14452124) to come up with a price for the index. Understand that this calculated number assumes that all stocks trade at these exact levels at the exact same time, which is an unlikely course of events. But I want to share with you the number I came up with, not because I am convinced we will get to this level, but because the level, coincidentally is almost the same level that the Dow traded at in the fall of 1998: 7900. I urge you not to take away 7900 as a level I believe the Dow is going to (I believe it will hold above that), but that 7900 is what I believe to be the very worst-case scenario. Panics and huge down openings, historically speaking, tend to lead to short-term reversals. What we've had for the past several weeks has been a slow erosion down, so a fast-paced down opening would be a welcome short-term change. If we don't get a fast-paced opening, then we can expect that slow erosion to continue.
Overbought/Oversold Oscillators
For more explanation of these indicators, check out The Chartist's primer.
RSS
