I gave the same warning several months ago in the Forums, except that now the stakes are much higher than a simple stimulus package (this is when I gave the last warning-January 24, 2008); this move by the US government has the potential to decimate the US economy and possibly the global financial system, or it will turn out to be a brilliant move if it works. I will keep my beliefs to myself, but I don’t believe any of these tactics have been brilliant – hmm, I guess that kind of gives away my position.

So the bottom line comes down to price movement. As a technical analyst that is really all that should be looked at because that dictates money lost or gained.

The Dow Jones will no longer have AIG included on it’s index Monday, Sept. 22. It will be replaced by Kraft. This leaves the index underweight financials and is thus probably not the greatest index for gauging the market. But since it is underweight the poorest performing sector, if it can not return and push through former resistance levels it will tell a very bearish tale. So these levels to watch use the DJIA.

Resistance levels:

12 000
13 200

A move through 12 000 would likely mean a move up to 13 200 and a bullish rally. This is VERY UNLIKELY at this time.  The reason is this: a short selling ban or a government bail out does not change the fact that no one wants to to buy these stocks (except those covering shorts). They are duds and are in trouble. It will be a long time before these financial stocks can begin to alleviate the issues they are having. With the financial sector in trouble it is unlikely that the overall market will move aggressively higher. At this point it becomes imperative to use the investment strategy that I outlined in the Investing Strategy section: Choosing only the strongest stocks to invest in the strongest sectors is crucial.

Support Levels:

10 500
10 000

These are the levels that if tested pose a large threat to the market. If these levels are moved below the fundamental and technical picture will be grim.  Next support could come at 9 000 or 7 500 (this would be close a 45% drop from the October, 07 top)

Bottom line is to watch the price levels. All the rest is just fluff. Price is all that matters.

Additional details just for fun: The bail out proposed is now costing $1.8 Trillion. That is almost 20% of the current debt already outstanding! With a deficit of $1.8 billion a day already, where is this money coming from? This should be interesting…

I was not going to put this in, but with the unbelievable surge in oil on Sept 22 (around $20 due to a short squeeze on the Oct contract) I thought it was worth making a note of it. Now the November contract is trading much lower than the Oct. contract, but still oil is heading back up. We shall see if this continues but the government intervention in the financial sector is having a direct impact on commodities which is causing a counter reaction to what they are trying to accomplish. In the economic cycle bond prices fall then stock falls, and then commodities fall. Commodities falling is what stimulates the economy back out of the cyclical trough. This is because things get cheaper, profits rise and economic expansion occurs as a result. This government intervention is seriously jeopardizing this natural flow of the markets.

The danger is that with this bail out plan of the US government means that many more dollars are now in play in on the global market. An increased supply of US dollars means an inflationary environment (that they can’t combat because there is already a housing crisis) and also a lower dollar (the currency markets recognized this immediately and we see sharp sell off in the US dollar). This means higher commodity prices and an economy which will take a very long time to recover because the natural order of things have been removed. The US government has basically socialized losses in the economy instead of allowing those that erred to foot the bill. This has distorted or completely decoupled the relationships in the market that allow the “invisible hand” to operate effectively over time.

Oh yeah, but none of that matters, only price matters, so watching those levels on the Dow is crucial. Maybe these apparently smart guys in the government offices are smarter than I give them credit for and this will turn out to be a brilliant move. But I am skeptical.