Investors approach the market differently. Some rely upon complex technical patterns and others simple patterns. Some turn to fundamental values and others use big picture ideas. Regardless of the approach taken, we all look to apply our ideas to the markets and search for opportunities.
Much has been written over recent months how the current rally is not supported by either an improving economy or stocks offering compelling values. The result is a market based on momentum. Being able to focus on one factor of market strength increases our chance of spotting reversals.
Momentum can be viewed by studying charts. At times investors use complex charting patterns. However, on other occasions simplicity works best. Having seen the market drop for two consecutive weeks, I believe we have reached the point where a simple story best illustrates the investment climate.
Within this bounce, I have been fixated on the 38% retracement level of 9,465. When the market was rallying from the July low, it took weeks for this resistance level to be broken (black arrow). Once resistance was broken, it became support and was needed to stop any market decline. That support now looks destined to fall (red arrow).
Were the Dow to close below 9,465 it would be ominous for equity markets worldwide. An immediate downside target would become 8,600 (red box). Given the strong correlation of markets during the rally, a falling Dow would take many international indices with it.