The Paragon Futures Report
Equity Markets' Outlook
By Brian D. Green
Brian D. Green is Chief Market Strategist of Paragon Futures Group, Inc. and Navis Capital Management, Inc., an introducing broker and Commodity Trading Advisor based in Powell, OH. Paragon Futures Group, Inc. specializes in financial futures while Navis Capital Management, Inc. produces The Paragon Reports, a daily advisory service for S&Ps, Nasdaq and T-Bond traders. The firms' clientele includes institutions, hedge funds, floor traders and individuals located throughout the world.
Going into Tuesday, September 11, 2001 the equity markets were already under heavy selling pressure. The uncertainty regarding military action after the attack as well as massive layoffs across the US gave the bears even more reason to sell. The question on almost everyone's mind now is "how low can it go"? Here is our outlook for the short-term market action in the major equity indices with a glimpse at the potential long-term action.
Prior to the attack, the DJIA had been trading in roughly a 1-1/2 year, 2000 pts range between 9500 and 11500. The downside target of the breakdown move is 7400-7600, back to the late- August 1998 and early-October 1998 lows. For the S&P futures, the December contract was consolidating in a 1109-1339 range since February of 2001 with the market breaking the range on September 06 and closing at 1101.40 on the day before the attack. The downside target of the 230 pts range break is 880 with the 925-950 key support from 1998 and also a 50% retracement of the pre-Gulf War low in late-1190 to the 2000 highs. For the Nasdaq 100 futures the comparable downside values are at 1050-1100. On September 21, 2001 the DJIA, S&P and Nasdaq 100 futures set intraday lows at 8062, 939.00 and 1097.00 respectively before closing higher. Note that the events of the past two weeks have produced extreme short-term moves for the major equity indices as well as other markets. Traders should realize however that markets typically do not (barring a "crash-type" scenario) make a straight line move to objectives. Normally there is a period of counter trend moves and backing and filling action. So where does the market go from here?
The bulls are severely wounded. It will take time to heal these wounds. Therefore a period of consolidation is likely. The key areas to watch on the DJIA show support at 8100-8400 with resistance at 9100-9500. For the S&P futures, support is at 940-980 with resistance at 1050-1085 encompassing the September 17 gap at 1063-1079. The comparable zones for the Nasdaq 100 futures are at 1095-1160 and 1285-1350 with the gap at 1318-1357. Note that the lower zones were tested on September 21 after five days of extremely heavy selling with the volatility index (VIX) spiking to its highest levels since 1998, a short-term low indication and the pricing on options indicating fear in the market (both contrary indicators). Also, our next critical date for a market inflection point as published in our December 23, 2000 Outlook 2001 report comes in at September 26. Typically these dates produce three days windows on either side of the date during which a market inflection point occurs. This coming week encompasses this time frame.
So, the market is very oversold and we have a potential key time period this week. Therefore, a rebound out of the recent extreme selling is likely in the near term. The question is whether the rally will be just a reaction to an extremely oversold condition or something more. Until proven otherwise the move must be viewed as just a reflex rally setting up the consolidation. The first sign that the market would be stabilizing would include closes for the S&P and Nasdaq 100 futures above at least 1017 and 1208. Such action would put the intraday sellers on the defensive. Close above 1044 and 1262, the closes on the first trading day after the attack, would put the short-term bears on the ropes. Closes above 1102 and 1382 would negate the consolidation view and be positive signs. These were the September 10, pre-attack closing levels. Anytime a market can recover to close above the close preceding a major event it is a very positive sign.
As for the longer-term view, the breakdown must be respected. One comparable period in history is centered on the late-1941 action preceding the attack on Pearl Harbor in December 1941. In our work we often look at very long-term cycles in our timing analysis. Such cycles include decade cycles with the recent action encompassing a potential 60-year cycle. A cursory review of the late-1941 to 1943 action shows that in roughly mid-September 1941 the market set a pivot high before moving 20% lower into the attack with the final low in late April 1942, roughly 30% below the mid-September 1941 high. The following 12-13 months the market rallied over 50%. Similar moves for the current environment would target 840 on the S&P futures, roughly 1000 on the Nasdaq 100 futures and 6800-7000 on the DJIA.
In summary, though we believe the US market will ultimately recover the action of the next 3-6 months is critical to the long-term action. Do not be overly anxious to "pick a bottom" in the market. The lines for defining at least a short-term low are well established. Until they are exceeded, the long-term selling pressure must be respected. Please visit our website to view our results in trading these volatile times or give us a call about our advisory or brokerage services to help you navigate the equity or other markets.