Dow slides towards temporary support

Price at time of writing – 15,698.

A 139-point decline since last Tuesday’s update has taken the Dow a step closer to my interim support – defined as a 55-point band 15,551-15,606.

Indeed, last Friday’s intraweek low of 15,618 came very close to the upper band of this temporary support, at which point a decline of 6.25% from the recent all-time high would be complete. Although some support will emerge from within this band, my longer-term target remains unchanged at 14,515.

I’m no great fan of the International Monetary Fund (IMF) – particularly when it rolls out what seem to be outdated, unnecessary views on overvalued house prices and the like – but I think its comments last week on global deflationary threats are spot on. Managing Director Christine Lagarde said, ’With inflation running below many banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery’. She continued, ’If inflation is the genie, then deflation is the ogre that must be fought decisively’. I find it incredible that some emerging-market central banks raised interest rates last week, although I had suspected they might, in a futile attempt to stem their recent currency declines. I don’t see it working, and I believe these same banks will soon be regretting their decision, as self-inflicted deflationary pressures begin to wreak havoc on their economies. It may not benefit everybody equally, but I see a healthy level of inflation as a vital part of a capitalist economy, and I think it should be nurtured at every opportunity.

Only a rise above 16,175 would indicate that the worst of the current correction is over for the Dow Jones. A rally back to 16,175 would provide an ideal opportunity to go short with even more aggression.

Recommendation: stay short. Add to short positions on any retest of 16,175. Target 14,515.

Dow Jones chart

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