The US market stands on a precipice partly of its own making, and also partly made in the eurozone. It is a precipice because the Dow Jones Industrial Average has moved in a broad sideways pattern. A move below 11,600 leads to a test of support near 10,600. A fall below 10,600 has extreme downside targets and the potential to retest the 2008 lows. The Dow’s ability to rise is limited by resistance created by a longer-term uptrend line currently near 12,400. The Dow has already reacted away from this resistance level near 12,300.

 

The key evidence of the precipice is the slowing of momentum that followed the rapid rebound from 11,200. This shows the rally has little strength. Only the most optimistic bull would describe the pattern of Dow behaviour as an uptrend.

 

The Shanghai market stands on the edge of a ledge, partly of its own design and partly made in Europe. This is support near 2,300. The market has bounced off this level and is in the process of creating a potential triple-bottom. A sustained rebound develops an uptrend. Failure of support near 2,300 sees a retest of the 2008 lows.

 

The difference is that the Shanghai Index fall has been slow and relatively stable. It has been engineered by the government with changes in regulation and targeted interest rates designed to tackle inflation and expand the domestic economy to take up the slack left by falling exports. China is concerned about its own economy. GDP has slipped to a recent quarterly increase of 9.1%. It has helped to take the heat out of inflation, but it is a delicate balancing act to manage and meet expectations of an expanding workforce. Most of China’s US$3.2 trillion ($4.1 trillion) in foreign exchange is in US dollars, which continues to weaken, with the US dollar index trading between 74 US cents and 79 US cents.

 

This is a market adjusting to changed conditions. This has included structural adjustments, and time will tell if these have moved far enough or fast enough. The collapse or slowdown of the eurozone will have a significant impact on Chinese exports, as Europe is its largest customer. China is on a ledge near the bottom of a cliff.

 

The Dow performance has been erratic and interrupted by significant collapses. This volatility makes the Dow more vulnerable to good or bad news coming out of Europe. The challenges of the US addiction to debt and the practice of funding problems “too big to fail” rather than solving problems — taking the medicine they prescribe for Europe — make it easier to go down than up.