World Markets Fall

World markets fell sharply Friday on nervousness about U.S. markets and resistance by the Taliban regime in Afghanistan to efforts to capture suspected terrorist Osama bin Laden.

European markets fell 4%-6%. One of the few major markets to avoid the sell-off was Japan’s Nikkei, which surged back above 10,000 on news that debt-ridden retailer Mycal had begun bankruptcy proceedings, raising hopes that Japan’s bad loan problem can be resolved sooner than expected.

When the U.S. stock market reopens on Monday, many companies may attempt to prop up the market by buying their own stock. The SEC plans to relax rules that restrict companies from buying their own stock. Companies are normally restricted as to how much of their own stock they can buy, and are normally not allowed to buy at the start and end of the day. Cisco was the first to take advantage of the rule change, announcing a $3 billion buyback. It does not appear that the stock exchanges will restrict short-selling on Monday, however. A test of the exchanges will be run tomorrow to see how well they function. Some Wall Street officials are concerned that the infrastructure still isn’t in place to facilitate stable trading.

In the U.S. commodity and bond markets, gold and oil rose and bonds surged to their lowest yields since the 1950s, as investors priced in further Fed rate cuts in a flight to safety, and market participants worried about the possibility of prolonged military conflict against terrorism. Congress approved $40 billion for anti-terrorism efforts and clean-up, and the Federal Reserve injected another $81 billion in reserves to stabilize the financial system. Discount window borrowing from the Fed – essentially acting as the lender of last resort – has soared to $12 billion from about $97 million a week ago, revealing considerable strain on the financial system.

Economic reports released on Friday were mixed. Retail sales were slightly stronger than expected, a big plus, but the Producer Price Index showed inflationary pressures from higher oil prices. Industrial production and capacity utilization showed that manufacturing remains very weak.

General Electric warned that this week’s terrorist attacks will hurt the company’s third-quarter results by about 10%. Ford also warned.

Market levels to watch for Monday: It is anyone’s guess what will happen Monday, but it’s interesting to note that before Tuesday’s tragedy, Elliott Wave technicians were calling for one more sharp move down and then a modest rally. However, they also see another wave down coming after that countertrend rally. The rise in gold, oil and treasuries would seem to argue for some selling pressure, but we’ll see. The Nasdaq, which closed Monday at 1695, has support at 1669, 1639, and 1619. 1700 is first resistance, but the first significant resistance doesn’t occur until 1770. The S&P 500 (closed Monday at 1092) has support at 1081, 1073 and 1058. 1100 and 1125 is resistance. The Dow (closed at 9605) has support at 9400-9500, 9100, and then significant long-term support at 8600-8800. 9869-9920 is first resistance. Interestingly, the cycles for next week all appear positive, which supports the possibility of a rally.

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