The Corrective Rally is over as the Stock Markets tumble on more Subprime bad news

By: Nadeem_Walayat

More subprime bad news hit the Dow as it closed down 242 points at 12,075, dragging the FTSE lower to 6161, which had earlier in the day rallied strongly to 6276. The sell off had started in Asia with many indices down between .5% and 1%.

The continuing, and one could say expected bad news from the US Housing market was from the US Mortgage Bankers' Association survey which showed that 0.54% of all loans began the foreclosure process in Q4 of 2006, the highest in the organisation's 37 year history of recording such statistics. This news again raised the strong possibility of the US going into recession later this year.

The market price action for both the Dow Jones and the FTSE 100 Index has been somewhat weaker than expected following the sell off that started on 27th February 2007. In the the article of 27th February (Stock Markets follow China Lower - What to expect next as China's crash continues in Asia) , the anticipation was for lows to be made, and for a rally that would retrace 50% of the decline from the subsquent lows, these targets were initially expressed as 12525 for the Dow Jones and 6,300 for the FTSE 100 Index.

FTSE 100 Index Outlook
The FTSE peaked at 6276 earlier Tuesday 13th March, which fulfilled its target for the corrective rally, having rallied by more than 50% from the recent low of 5990. The clear initial target for the FTSE is the 5990 Low, which would represent a decline of some 170 points from the last close.

However, at this point further downside below the 6000 level appears limited, with very heavy support in the region 5900 to 6000. This suggests that despite the negative chart picture in the price action to 6000. That the FTSE could just hold the 6000 level and bounce .Should 6000 break (5990), then the outlook is probably for drifting action in the region 5900 6000, during which the future prospects for the FTSE will become clearer.

In Summary - FTSE 100 is targeting 6000, there is a strong probability of the FTSE holding 6000 (5990 low). Further downside appears limited in the immediate down swing.

Dow Jones Indst Av. Outlook
The corrective rally proved weaker than expected, failing to retrace 50% of the decline towards 12,420. Therefore this suggests that unlike for the FTSE 100 Index, the low of 12,040 should be breached, especially given that Tuesdays decline has already placed the Dow Jones within striking distance of this target.

So I am assuming that the low of 12,040 will be breached, therefore the Dow Jones is targeting a decline to between 11,650 and 11,750 as per the analysis of 27th Feb 07. Immediate support lies at 12,000, which given the relative weakness does not look as though it will be of much benefit.

In Summary - Dow Jones is targeting a down swing to between 11,650 and 11,750.

By Nadeem Walayat,
Editor of The Market Oracle.
Copyright © MarketOracle.co.uk 2007

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