I’ve noted repeatedly that I claim no special ability to be able to anticipate what the markets are likely to do in the future. I have personal experience with a number of people who profess to have special systems that allow them to be able to accurately forecast the movement of the financial markets. The one thing they all have in common is that they are wrong.

I’ve done a lot of reading and research about risk, odds, and randomness and I could give some in-depth explanations about why they always end up being wrong, but that would not serve my purpose today. The point I want to make is that there are times when almost anyone can forecast an imminent event.

For example, this afternoon my family will be spending several hours at a water park. It is a bright sunny day and the temperature should approach 100 degrees. Because of the conditions, I can forecast with near certainty that someone in our group will end the day with a sunburn. Even though we will be using sunscreen and taking precautions to prevent it, experience has shown that someone will forget or ignore the need for protection. Even if everyone is careful, given the conditions, the best precautions might still not be enough.

In similar fashion, given the current economic conditions, I can predict with a good probability of accuracy that the most likely direction for the financial markets over the next few weeks is down.

Below is a chart showing price movement of the Nasdaq over the past three years. Since October 2007, the trend of the Nasdaq has been downward. As noted repeatedly in the past, trend is the most powerful and consistent of any market indicator. The next level of technical support for the Nasdaq is about 2,180 (I’ve marked the level with the shorter red line). It seems likely the index will test that level within the next few sessions.

Some of the reasons I expect such a test include:

• The Dow and the S&P 500 have already broken below support and are at their lowest levels of the year. In a weak market, it is unusual for the Nasdaq to be the strongest of the three major indices.
• The moving average convergence divergence (MACD) shown by the lower portion of the chart seems to be indicating further weakness.
• The Nasdaq recently broke sharply below its 50-day simple moving average (gold line).

If the index breaks below the support at 2,180, the next level of technical support is near the 2,000 level marked by the longer red line. Because of the current economic weakness, rising oil prices, etc., I think there is a good chance the Nasdaq could fall to this level by the end of summer.

Have a great Fourth of July weekend. This report is a day early because of the holiday.
F.S.