Quick Look at the Dow and S&P

Let’s peek quickly at the Dow Jones Index to see where we’ve come and where we may be headed this week:

There is a large barrier which has served both as support and resistance at 12,800.

More recently, the falling 20 period moving average has served as key resistance during the last three trading days (the level is currently at 12,200).

There appears to be support above 11,700, but larger funds and many traders have likely placed stops just beneath the January 2008 intraday lows, not expecting the market to reverse to that level, and should those stops be taken out through a test of that level, then we could see a large volatility continuation move to the downside as the market slices through the large number of sell-stops (and sell-short stops) that are placed conveniently beneath this level. Be sure to watch that price.

The level on the S&P 500 chart is a little clearer, being just at 1,270. Major resistance comes in at 1,400.

The 1,270 is also very significant, as it serves as the 38.2% Fibonacci retracement on the monthly S&P chart (if you draw a grid from the 2002 bottom to the 2007 top). The market has tested this level three times now – we cannot be certain it will hold for a fourth test.

Notice how the closing price last week (on the weekly chart) officially breached (closed beneath) the key 200 period moving average for the second time in a row.

However, two factors may render chart watchers irrelevant next week:

1. The Fed’s announcement to cut interest rates either greater or less than the Street is expecting
2. The Quadruple Witching options expiration at the end of the week (remember that Friday is a holiday)

Both events will kick-up volatility and likely send prices cresting in relatively unpredictable direction.

Also, as of Sunday evening, officials announced that JP Morgan Chase will be purchasing battered Bear Stearns for $2 per share, which the Feds approved.  According to the Yahoo article, “Early indications, though, pointed to continued fear about the stability of the U.S. market, as the dollar hit fresh record lows against the euro, gold broke through $1,015 an ounce and Asian stocks sank.”

UPDATE: In an extremely rare weekend move, the Federal Reserve cut the short-term discount rate from 3.50% down to 3.25%, cutting rates early by .25 bps.

If you’re a new trader, please consider taking off trading next week unless you know what you’re up against, or have a contingency plan along with a solid money management plan in place to take care of developments outside your expectations.  With the new developments, it may pay to sit back and let the volatility play out before you try to get involved in the potential wild volatility that will begin as early as Monday morning.