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Market Set To Open Lower On U.S.-led Attacks

On Wall Street, there's news, and then there are surprises.

The market doesn't like surprises (unless they're positive, of course). Fortunately, yesterday's U.S.-led attacks against Taliban and terrorist targets in Afghanistan were expected by the market, and thus the news hasn't rattled futures traders too much this morning. So far, the futures are down about 1%-1.5% in the premarket.

The problem, of course, is what happens from here. If the operation is successful, a huge rally would be the likely scenario. And success would likely be defined as capturing or killing Osama bin Laden and his top associates. Anything less would appear to leave the threat intact and give the terrorist network a chance to rebuild.

If the operation drags out and it appears that it could be difficult meeting that objective, the market could come under pressure. The market's other worry is that U.S. officials have said that bin Laden is all but certain to attempt other terrorist attacks. Given the market's reaction to scares so far - anthrax cases in Florida, a Greyhound bus incident, and the mysterious downing of a Russian jetliner - this is probably the market's biggest fear.

But all of that is just speculation. We'll let the charts tell us what's going on here.

As we said on Friday, the Dow, S&P 500 and bank stocks were threatening to break down even before today, so even a modest down day calls the current rally into question, and another 20-point drop in the banking index (BKX) would look pretty bearish. The close on the BKX today is probably the most important thing to watch.

But the current rally has also built nicely on previous tops and consolidation. If it is to continue, those tops must now become support. In the two charts below, we mark the two main areas of support for the Dow and S&P. For the S&P, those support zones are 1041-1052 (the preferred support for the bullish case), and critical support is 1017-1020. A move below 1016 would call the rally into question, and below 998 would likely lead to a full retest of the lows. A move above 1072 and then 1084 would mean that the rally is not done.

On the Dow, the preferred support for the bullish case is 8850-8895, and critical support is 8672-8686. In short, if the first leg of the September 24 rally is taken out, the odds are high that it is a bear market rally. A move above 9131 and then 9187 would mean the rally has further to go.

October 11 remains the most important near-term cycle turn window, although some have tomorrow as a short-term low.