Dow Could Fall to 14,000 if This Happens

by Sam Collins | October 4, 2013 2:33 am

Stocks fell across the board as the government shutdown continued for its third day with little progress toward a resolution.

The Dow was down as much as 186 points following a Treasury official’s warning that if the country defaulted the consequences could be worse than 2008. But the market rebounded following a statement by House Speaker John Boehner that the Republicans wouldn’t allow a default on its debt. Stock dipped again in the early afternoon on an incident involving gunshots heard on Capitol Hill, but recovered by the close.

Defense contractors sagged in the face of the shutdown, and the housing sector was hit because of the imminent delay in mortgage processing by government agencies.

The purchasing managers index for September fell to 54.4 from 58.6 in August, missing expectations of 57. But jobless benefits increased only 308,000 versus an expected 314,000. The Labor Department will not issue the September jobs report on Friday because they aren’t working. (Sorry, I couldn’t resist.)

At Thursday’s close, the Dow Jones Industrial Average fell 137 points to 14,996, the S&P 500 lost 15 points at 1,679, and the Nasdaq was off 41 points at 3,774. The NYSE traded 703 million shares and the Nasdaq crossed 450 million shares. On the Big Board, decliners exceeded advancers by 3.7-to-1, and on the Nasdaq, decliners were ahead by 2.8-to-1.

Dow Chart
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Chart Key[1]

The Dow closed below the psychologically important round number of 15,000 for the first time in a month. But of more significance is its MACD sell signal at this critical time when the 200-day moving average is under attack. A close below the 200-day would set up the index for a run to the next support level at 14,000 that was constructed at the beginning of the year.

VIX Chart
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The CBOE Volatility Index (VIX) rose 6.45% Thursday, a 35% increase from its Sept. 20 close. This indicates that an increased level of fear is entering the market, and with that, increased volatility.

Conclusion: The oft-mentioned 1,676 support level of the S&P 500 held Thursday, but it closed below its 50-day moving average at 1,680 (see Oct. 3 Daily Market Outlook[2]). And, as noted, the VIX fear index has increased significantly since its September low, and the Dow industrials broke 15,000, setting up a serious challenge to the 200-day moving average.

But volume is still light and breadth had a mild increase as stocks tumbled, indicating that the investors are still not convinced that stocks are headed significantly lower. A violation of the major support line at S&P 500 1,676 and a close below the Dow’s 200-day moving average would create a serious technical challenge.

The difficulty in making a purely bearish prediction is that the market is in the hands of the legislators, and thus liable to the headlines that they create. An end to the shutdown would help. Avoiding a default before Oct. 17 could result in a significant Halloween rally.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[3].

For a list of this week’s economic reports due out, click here[4].

  1. [Image]:
  2. Oct. 3 Daily Market Outlook:
  3. click here:
  4. click here:

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