Since the previous edition of the Sterling Weekly, the Dow Jones Industrial Average declined 436.67 points or approximately 4.1%, to finish at 10,172.98 The Dow lost approximately 430 points in the final 2 days of trading last week. The market pullback was primarily ignited by new proposed regulation on the banking industry that are perceived as causing banks to tighten credit. Additionally the uncertainty over the confirmation of Fed. Chairman Ben Bernanke whose term as Chairman of the Fed. effectively expires at the end of this week. Regardless of the cause, the fact of the matter is that the Dow Jones Industrial Average appears to be in the process of braking, if it hasn't already done so, its upward trend that has been in place since March of last year. So I thought it would be relevant to take a look at where support comes into play on the Dow and see what that might tell us, as it is important to know if this is just a short term pullback or the start of a new downward trend.

I've inserted below a short term chart of the Dow Jones Industrial Average that shows the Dow breaking below 3 points of support that have been established since mid-November. The next points of downside support are at 10,092.19 and 9,712.73, as indicated on the chart. You can also see on the chart the trading channel that has been developing since mid-November. (Note: I 1st published a chart showing this trading channel in the December 28th, 2009 edition of the Sterling Weekly with a note stating there was an increasing chance of a pullback.)

Now I believe the trading activity on Monday and Tuesday will really determine if this is a short term pullback or the start of a new downward trend. I see one of two possible scenarios developing. By the close of trading on Tuesday the market has rallied and in effect re-enforced the trading channel that has been developing since mid-November and we are going to see an increasingly volatile market. Or, the market is even lower by the close of Tuesday and we have broken the upward trendline that has been in effect since March and started a new move downwards. In a typical market movement there is the belief that a run will have three (3) legs to it. I'll be the 1st to admit that defining these legs can easily be more of an art than a science; but if we have experienced 3 upward legs, then the odds of a major pullback are fairly strong. I've published a slightly longer term chart of the Dow Jones Industrial Average below showing what I think would be the three (3) upward movements since the March 2009 lows in the market.

If I am correct, and we have seen the three (3) upward movements and are starting a new downward trend, then the question is how far down could we go? Well, in the August 24th edition of the Sterling Weekly I published the Fibonacci Retracement numbers on the decline where I forecast an upwards move on the Dow Jones Industrial Average to somewhere between the 9,086 and 11,625. Additionally in the November 23rd, 2009 edition of the Sterling Weekly I stated that we were entering an area of upside resistance that could make further advances in the Dow tougher to come by. Well, if the current upward movement is over, then Dow rally peaked with a closing high of 10,725.43 on January 19th of this year. That would represent a rally upward of approximately 4,178.38 points from the closing low of 6,547.05 set in March of last year. Since a typical retracement is somewhere between 1/3 and 2/3rds of the move being retraced, then a 1/3rd retracement would take the Dow down to 9,332.64 and a 2/3rds retracement would take the Dow down to 7,939.84. Again I would like to point out that the media likes to focus on a 50% retracement as the most likely occurrence, so a 50% retracement would be to 8,636 which is where there appears to have been a lot of previous activity and an area on the chart where the Dow could find itself stuck for a time.

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