**24/11/10 - 8.41am - by James Gerrish**
It was pretty much a perfect storm for weakness in the equity markets last night with military action between North and South Korea coming on the back of continued concerns surrounding contagion of Ireland's debt situation, the implications of the QE2 program and China's plan to manage growth - the three points we touched on last week.
Going to bed last night I was afraid that we'd wake up this morning with equity markets down significantly so a drop of the
DOW JONES of -142 points or -1.27% to 111036 was strangely a bit of a relief. Volume was also light on the market so selling pressure didn't rise significantly. The US market is closed on Thursday for Thanks Giving and there will be a half day on Friday which is generally a pretty lethargic session.
This morning, the SPI FUTURES are pricing a drop of 51 points on the open.
There were a number of important developments out of Europe last night with Germany releasing GDP figures that were slightly below expectations (but still very strong) however it was the comments made by the Chancellor Angela Merkel who said the Euro was an "extremely serious situation" that caused some concern and sent European shares sharply lower.
As I said last week, I think this whole situation is overblown with the EU and IMF the resources to bail out Ireland if need be and if contagion does play out they have the fire power to deal with it. If you want to focus on one concern it would be Spain who accounts for 10% of Euro zone GDP - but we're yet to see any clear warning signs here.
The big unknown in the market that I think could linger in the short term is the instability between North and South Korea. North Korea has a trading alliance with China while South Korea is aligned with the US and tensions here could be the real danger in the near term. There needs to be some consensus between China and the US condemning the move however I think that will be unlikely out of Beijing.
So this presents the obvious question - How do we play markets at the moment?
I think that headlines at the moment are pretty dire. Resource companies, given the significant rise they have had, are likely to remain under pressure and this is also being magnified by some short term price appreciation in the USD. I don't believe this is a sustainable theme and ultimately we'll revert back to USD weakness which will be supportive of commodity prices. This is largely based on the medium impact of QE2. So for those with a longer term horizon, I believe we should be looking to increase holdings once prices find support. Its always a risk to try and catch a falling sword as they say so my preference here is to stand aside while the market falls, and get involved when we see signs of buying support step in. You'll miss the ultimate bottom in the stock you're looking to buy however we'll avoid stocks that continue to slide.
In respect of the local benchmark, the S&P/ASX 200 has a key level of support around 4580. I believe this is a key level which we're likely to break below today. For mine, a close near the session lows today, below this level is significant and we're likely to see some further weakness short term. From a technical sense, the next level of key support sits around 4500.
(SEE CHART)
The Aussie Dollar is also worth monitoring. From a technical sense, a break of 96.80c against the USD will be bearish. This is a head and shoulders pattern which essentially means that the market has made a lower high and it signals a change in momentum.
(SEE CHART). This is a short term move and at the moment it looks bearish. Certainly worth keeping an eye on.
James Gerrish
(02) 9375 0117
