Stocks: Wall Street set for another weaker open

US stock index futures point to a weaker open on Wall Street today. Following the near 300-point drop yesterday, the Dow is currently another 120 points worse off at 17600. Sentiment has been hit by the increased military action in Yemen. Although Yemen itself plays no major role in the financial markets, this is yet another Middle Eastern nation to fall in the hands of the rebels. Significantly, the Houthis are Shia rebels and they are reportedly backed by Iran. This could exacerbate the hostility between Sunni and Shia militants. Unfortunately things could get really ugly and not just in Yemen but across the whole region with Islamic State, al-Qaeda and other terror groups fighting for power. For the oil market, Yemen’s geographical position is highly important because of the Bab-el-Manded strait where million barrels of oil pass through each day. Thus if the security situation in region deteriorates this could, for example, increase insurance costs which may force oil producers to hike their prices. A rise in the price of crude prices because of supply-side risks, as opposed to, say, a rise in demand, may not necessarily be good news for the share prices of some energy stocks. Nevertheless, this could scare away more oil bears and cause prices to stabilise.

In addition to the situation in Yemen, the stock markets are weighed down by profit-taking following the recent central-bank-inspired rally. As well as the European Central Bank introducing QE this year, the US Federal Reserve has turned somewhat dovish following the recent soft patch in US data, though in the Eurozone things are finally starting to look bright. Therefore with the major central banks’ highly accommodative monetary policy stances still intact, yield-seeking investors may still be looking for opportunities in the stock markets after every notable pullback. This trend is likely to remains in place for the foreseeable future, especially in Europe. For me, it would be wise to wait for the dust to settle before also turning bullish in the short term.

But in the US, the major indices are looking somewhat shakier with investors moving funds into Europe. As a result of this week’s sell-off, the Dow has broken below the prior low of 17625, thereby paving the way for further losses in the near term. It would be a significantly bearish development if the index closes today’s session below the bullish trend line which also happens to be around the 17625 level. That said, some key technical levels are now fast approaching which may offer strong support. As can be seen, there are two sets of Fibonacci levels on the chart. The 61.8% retracement level of the most recent upswing comes in at 17510/15. But the more significant support could be further lower around the 78.6% retracement level at 17305. That is because at least two other technical factors also converge around there: the 200-day moving average comes in at 17345 while the 38.2% Fibonacci retracement of the rally from October is at 17355. So the 50-point range between 17305 and 17355 is a key support area to watch. Meanwhile the broken support levels could now turn into resistance. The first such level is at 17625 followed by 17700. A break above the latter would be a bullish development which may pave the way for a rally towards the next key level at 17950.