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No Support in the Stock Market

By: Jon Galane

IRA Insights

The Case:  No Support in the Stock Market

By Jon A. Galane, MountainWest Entrust IRA

Many investors lately feel that sinking feeling in the pit of their stomach as they look at their 401(k) and IRA statements. Since an all time high on October 9th of 2007 of 14,164, the Dow Jones Industrial Average has steadily gone down. On October 19, 2007 support levels in the market began to decay creating a demarcation day as the market began its steady decline, a day I will call the first Black Friday of the 21^st century. The market is now quickly approaching a 20% drop from this date.

It's easy to understand investor angst, on July 2, 2008 the Dow Jones Industrial Average closed at 11,215. The news of today included GM, Ford and Toyota sales slump on falling demand. GM tumbled to the lowest levels since 1954 after a Merrill Lynch analyst suggested bankruptcy. The average price of regular gas has just gone up to $4.09, oil is at an all time high closing at $143.57, and god willing Starbucks survives as they announced the closure of 600 stores and cut 12,000 jobs. On July 2, 2008 the market is officially being called a bear market. Goldman Sacks in the last week put a strong sell on Citigroup and Merrill Lynch.

Do investors really believe that their stock portfolio has the opportunity to go up in the near term future?

Here is what the technical analysis of the Dow shows us. There are two levels that determine the direction the market will go as a path of least resistance. Support levels; this is the lowest point level the market has moved on the bottom side over a period of time. Higher support levels indicate a bull market; decreasing support levels indicate a bear market. Resistance levels; this is the level that stocks resist going above and if the stock or index breaks through a resistance level it will probably move further in that direction.

As I was studying the market this past week I saw a very disturbing trend. March 12, 2007 the Dow had its highest support level of 12,318. The market then jumped up on August 15, 2007 followed by 5 consecutive support level drops. Further, the Dow is below its highest low (support) of March 2007. The next support level is 10,816 made on June 14, 2006. If the Dow breaks this support level the next support is at 9,757 made on October 22, 2004. Notice all of the repetitive October support dates.

On the resistance side we have seen a decreasing resistance level in the Dow since October 8, 2007. We are coming up on a year of decreasing resistance in the Dow. The last date of a truly long term resistance breakthrough was December 28, 2004 with a level of 10,854 which we are quickly approaching. A downward breakthrough of this resistance level will signal a sell off to at least the next support of 9,757.

On June 30, 2008 OPEC announced that oil prices should be at $170 per barrel by the end of the year. If they are correct, there would be no significant reason for the market to stay above 9,757.

Using your self-directed IRA. When I was a practicing Investment Advisor, people would rationalize by saying the market always comes back. Beware of the current economic and political scenarios. This article will not go into the various scenarios, just know there are many economic difficulties we face on top of a political election involving energy, taxes and new government program spending in the $250 -$300 billion range.

Yes the market goes up but at what rate vs. alternative investments such as Real Estate, oil or gold. I see an uncanny relationship between current day and 1973 through 1978. January 1, 1973 the Dow was 850. December 31, 1978 it was 838. Down -1.4%. Do you feel comfortable losing money over the next five years with what may turn out to be the highest double digit inflation in the history of our country? Or would you like an investment you control, receiving income and growth in what you know best?

You can't control what the new president and congress may do to increase your taxes, spend your money or make bad energy decisions. Do you feel comfortable with losses after inflation that could end up being a real rate of return of -20% to -40% a year over the next 5 years? Have you ever invested in real estate, trust deeds, or other alternative investments that have lost 20-40% a year over 5 years? At a 15% inflation rate including oil and food and a negative 5% drop in the market you could feasibly lose 100% of your portfolio in 5 years. Do you really want your future to depend on the market coming back?

You can control your investments in what you know best and where you know how to make money! Open a self-directed investment today with Mountain West Entrust IRA in Idaho or Utah and you will be able to get rid of that sinking feeling of doom you're having now!

Jon A. Galane is principal and CEO of Mountain West Entrust IRA.   Mountain West Entrust IRA has just opened its Utah office in Salt Lake City, Utah.

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