Jermy Grantham: Danger – Children at Play

The main long-term risk is that after two massive bubbles and two equally massive resurrection programs, the Fed may be out of ammunition. Should more building blocks fall (government bond downgrade and further market declines have missed my deadline) and a serious global double-dip develop,  then the pattern of market behavior this time may be more historically typical. That is, instead of quickly recovering, markets will become cheap and stay below long-term averages for several years as was the case pre-Greenspan.

Jeremy Grantham: Danger – Children at Play (Scribd).

US & Canada target levels

The Dow Jones Industrial Average broke primary support at 11800 but encountered buying Friday around the former primary level of 11500. We may witness retracement to test resistance at 11800, but this is expected to be overwhelmed by sellers. Medium-term target for the down-swing is 10800*.

Dow Jones Industrial Average

* Target calculation: 11800 – ( 12800 – 11800 ) = 10800

The Nasdaq 100 fared better, recovering above primary support at 2180. But Twiggs Money Flow below zero, and the earlier bearish divergence, warn of strong selling pressure. Failure of support is likely and would offer a target of 1920*.

Nasdaq 100 Index

* Target calculation: 2180 – ( 2440 – 2180 ) = 1920

The TSX Composite Index was one of the first markets to enter a primary down-trend and has now confirmed with a break below the latest support level at 12750. Expect some support at the target of 12000* but the July 2010 low of 11000 beckons.

TSX Composite Index

* Target calculation: 12750 – ( 13500 – 12750 ) = 12000

UK & Europe

The FTSE 100 continued on its downward path, approaching its calculated target at 5100*. Expect some retracement this week, but I would not place much reliance on support at 5100 — strongly suspecting that we will see a test of the June 2010 low at 4800.

FTSE 100 Index

* Target calculation: 5600 – ( 6600 – 5600 ) = 5100

The German DAX index has already passed its initial target of 6500 and is headed for a test of 5600.

German DAX Index

* Target calculation: 6500 – ( 7600 – 6500 ) = 5400

US stampede

A friend at golf yesterday, who still holds a number of stocks, asked if they are likely to fall any further. My answer was that holding on to stocks in this market is like standing in front of a stampeding herd in the hope that it will stop before it reaches you. There may be a short retracement early in the week, but strong selling is expected to overwhelm buying support. On August 3rd I gave the probability of a down-turn as 75 percent. The odds are now about as close to 100 percent as you can get.

S&P 500 Index

The S&P 500 followed through below support at 1250, confirming the primary down-trend. Friday’s brief rally was swamped by further sell orders. The herd has started to move. We are beyond the tipping point.

UK & Europe crash

Posted August 3, 2011 8:00 p.m. ET (10:00 a.m. AET) on Trading Diary.

The FTSE 100 followed through below 5600 after breaking primary support at 5650, confirming a primary down-trend.

FTSE 100

 

The DAX similarly broke primary support at 7000 on the weekly chart and is now testing its earlier support level at 6500 — breach of that would be the final nail in the coffin. Bearish divergence on 13-week Twiggs Money Flow has been warning of selling pressure for several months.

German DAX

Dow at the tipping point

Posted August 3, 2011 8:00 p.m. ET (10:00 a.m. AET) on Trading Diary.

The long tail on today’s candle for the Dow Jones Industrial Average indicates buying support, but 21-Day Money Flow below zero warns of longer term selling pressure. Only recovery above the rising trendline would call the bear signal into question. Follow-through below today’s low at 11700 would confirm the primary down-trend — as would a close below 1250 on the S&P 500.

Dow Jones Industrial Average