WEAK ECONOMIC NUMBERS PUSH MARKET BACK NEAR 2002 LOWS -- DOWNSIDE TARGETS FOR THE DOW AND S&P IF THOSE LOWS ARE BROKEN

WEAK ECONOMIC NUMBERS PUSH STOCKS LOWER... The Dow Industrials and the S&P 500 closed at the lowest level in twelve years on Monday. I cautioned, however, that the most important close of the week would take place on Friday. That's because today is the last trading day of the week and month. At mid-day, stocks are trading near their low for the week. The monthly bars in Chart 1 show the S&P 500 trading dangerously close to a new 12-year low. Unless the market stages a late rebound, and if the 2002 low is decisively broken by most stock indexes, long-term stock charts could start looking a lot more bearish.

Chart 1

MEASURING FROM THE 1982 LOW ... A big reason for today's selling is the report that the U.S. economy shrank during the fourth quarter by -6.2%, which is the weakest since 1982. That's the year the last secular bull market in stocks began. With the market now in a secular bear market, it's reasonable to use the 1982 bottom to help determine some potential downside objectives. Chart 2 plots the entire trend in the S&P 500 since 1982. A potential "double top" exists between the 2000 and 2007 peaks. The chart shows that the S&P has just fallen below a fifty percent retracement of the entire bull move. If the 2002 low is decisively broken, the next potential target for the S&P would be a 62% retracment near 660. The same measurement for the Dow Industrials is near 6000 (Chart 3). Obviously, a lot is riding on whether or not the 2002 lows hold.

Chart 2

Chart 3