Courtesy of John Nyaradi.

Dow Jones Industrial Average declines on political worries.

Charles Dow

Last week saw more turbulence in global financial markets and the Dow Jones Industrial Average (NYSEARCA:DIA) as Republicans and Democrats squared off over their differences in approach to averting a government shutdown now scheduled to start at midnight Monday.

With no compromise in sight, it appears that at least a short lived shutdown could get underway by Tuesday morning.  The bigger issue, however, still looms ahead as the U.S. government is scheduled to run out of money to pay its debts sometime in mid-October.  This event would have global ramifications and, while nobody believes it will happen, the standoff in Washington sets the stage for a rocky month.

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) fell 1.3% while the S&P 500 (NYSEARCA:SPY) dropped 1.1%.  The Nasdaq (NYSEARCA:QQQ) edged slightly higher with a gain of 0.2% for the week while the Russell 2000 Index (NYSEARAC:IWM) closed narrowly in the green with a gain of 0.2%.

Gold (NYSEARCA:GLD) gained 0.3% to close at $1336/oz. while oil (NYSEARCA:USO) fell 1.6% to $102.81/bbl on Friday.

 On My Stock Market Radar

The chart of the Dow Jones Industrial Average (NYSEARCA:DIA) below shows how a double top has been formed in the 15,600-15,700 level and has fallen some 400 points over the last six trading days.

The Dow Jones Industrial Average (NYSEARCA:DIA) has also  just broken its 50 day moving average which is widely watched by shorter term traders and the next serious level of support is at the 14,900-15,000 level, approximately 2% from current levels.

chart courtesy of StockCharts.com

So as the third quarter comes to an end, we find the major markets still up significantly for the year, with the Dow Jones Industrial Average (NYSEARCA:DIA) up 16% and just 2.7% off recent all time highs.  With October right around the corner, short term fundamental headwinds now center on the political debate in Washington which will quickly be followed by the beginning of Q3 earnings season.  The technical picture shows substantial short term weakness with “sell” signals on various indicators and the recently formed double top which will provide significant resistance if and when the fundamental problems are resolved.

Stock Market News You Can Really Use

The main action at the end of last week was the impasse reached between Congress and the White House which makes a government shutdown more likely.  Economic impacts depend upon how long it lasts, while psychological impacts could be more significant if market participants don’t quickly get their expected outcome within a few days.

The most likely scenario is intense brinkmanship up until the last minute with some sort of settlement in the nick of time to avert a U.S. default on its debt.  However, the last time this situation played out, the last minute “deal” was the sequestration, reached at the 11th hour and after a 15% decline in major U.S. stock indexes.  And this was without any demands to delay or defund “Obamacare” which could prove to be the ultimate line in the sand for both sides.

The net result of all of this is that we’re witnessing a titanic political struggle, the outcome of which will depend on which side blinks first. There appears to be no compromise in sight and, if that remains the case, over the next couple of weeks we’ll see a “winner” and a “loser” emerge.  Hopefully all of this drama won’t be at the expense of the U.S. and global economy.

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