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Market at key support levels

(April 7, 2002)

Recall that in Wednesday's commentary, we suggested that even though the downtrend has been confirmed, the market could bounce because of the high P/C ratios. Despite the Nasdaq making a lower low, however, the Dow did bounce-from 10,198 on Wednesday to 10,271 on Friday.

We believe the MMM reiteration and revision of quarterly earnings was a desperate attempt to manipulate the Dow to stay above its key support levels. MMM alone was good for a 45-point gain in the Dow on Friday. Without the rise in MMM, the Dow would have had a negative close. What do I mean by key support levels? Well, take a look at the chart below:

Current and Key Support Level of the Dow Jones Industrials (September 2001 to Present)

The black line is the up trend line in place since the bottom on September 21, 2001. The Dow tested the line in late February, but never closed below it. We are currently at that juncture, once again. The red line above is the 50-day moving average. It currently stands at 10,159. The 200-day moving average is not shown but it currently stands at 9,975. All three of these are critical support levels. For the Dow to close below ANY of these levels would be very bearish. If the Dow closes below all three of these levels, then I believe a "watershed" decline will emerge from here. What do I mean by that? Try a retest of the September lows or possibly even lower.

We believe the technical situation of the market is very vulnerable to such a decline. Consistently low P/C ratios, the lack of a rally in recent days, an up trend in the VIX, the Middle East situation, and the recent huge up tick in margin debt. Even as the market has failed to rally, the longs just kept on piling them on. Eventually, they will be fed and/or be forced to sell. Judging by the current look of things, we believe it will only be a matter of time.

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