We had upgraded our support level for the Dow Jones Industrial Average (DJIA) towards 11,100 from the 10,800-10,900 range and were expecting a rebound off that level. While the index closed at 11,000 after dipping to an intra-day low of 10,977, the wave pattern did not indicate that a significant low was in place.
From a psychological perspective, the selldown on Freddie Mac and Fannie Mae is reminiscent of the steep selldown on Bear Sterns at March lows. Both were the most actively traded stocks on NYSE but rebounded substantially above their lows on record volume.
The VIX index, which measures option volatility on the S&P100, however has not spiked up in a significant manner and still remains below January and March lows. Typically, a spike in VIX coincides with a significant low. We have not seen this yet.
At this juncture, the DJIA is at a make or break level. A close below 11,100 could see the index decline towards 10,800 before any meaningful rebound ensues. Until, it is shown that the 11,100 level can be held for two consecutive days, we recommend staying on the sidelines.
For the Straits Times Index (FSSTI), it has managed to hold above the 2,880 level despite a host of bad news, so that is encouraging. However, we would prefer to take the lead from chart formations on the US and adopt a wait and see stance for the early part of the week.
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