What we are seeing in the markets does not present an optimistic picture. Needless to say, it’s quite the opposite. That the Dow Jones Industrial Average (Djia) retraced 50% of the bull market that started in August 1982 gives us reason to worry. This 50% retracement is a significant Fibonacci retracement, and if a reversal does not take place here, the next significant Fibonacci retracement level would be at the 61.8% area. The Djia has closed below the 50% level, so it’s now a matter of how it behaves between the 50% and 61.8% levels. That will give you some idea as to how much lower the index could go. And if it does go below the 61.8% level, then brace yourself for a free fall. The Djia could hit the 4000 levels.
While the Djia has fallen below a critical support level, the Standard & Poor’s 500 is still hanging in there, bouncing off its support level at around 740. There’s a strong chance it may break below this level, confirming the downward move of the Djia — then again, maybe it won’t.
Hand in hand with these bear markets, the economic outlook seems to get worse. Consumer confidence is at its lowest level on record, which isn’t surprising, given that Americans are worried about losing their jobs and worried about their dwindling nest eggs. Companies that usually provide dividends are struggling, the financial sector is wiped out, and the market cap of the S&P 500 is shrinking rapidly.
As pessimistic as I may sound, there are still money-making opportunities in a bear market. Precious metals are doing well, as are government bonds. The currency markets provide plenty of short-term trading opportunities. And of course, there are various option strategies you can apply to hedge your positions.
If you haven’t noticed, I have touched on Fibonacci retracement levels, support levels, economic fundamentals, market cycles, and options. And in this issue of Technical Analysis of Stocks & Commodities, we have articles that discuss each of these topics in greater detail. There are countless techniques you can apply to the markets, and these can change, depending on how the market behaves. Among these different techniques, however, there are factors in common that underlie these various analytic processes. These commonalities play a role in technical analysis, earning the respect it deserves in the financial industry. And that is what Andrew Lo, our interview subject this month, hopes to do. He has a challenging project ahead of him, and we hope he succeeds in making the financial industry understand the value of this hidden art.
Jayanthi Gopalakrishnan, Editor