Wednesday, February 17, 2010

Long term analysis of the Dow, Nov 2, 2009


Never invest your money in anything that eats or needs repairing.
Billy Rose, 1899-1966, American Composer of Popular Music

When we compared the current pattern to that of the 1929-1930 Era in an article titled The Dow; ominous parallels to the 1929-1930 Era , we stated that the pattern was calling for the Dow to pull back all the way to the 1400 ranges. This does not mean we are actually stating that this will come to pass right now; we are just talking about possibilities.  Simple trend analysis confirms this target. Furthermore, it actually shows that if this were to  occur, the main up trend line would not be violated and the bullish pattern of higher lows would still be in effect (shown by the green circles)
We have 5 up trend lines here and according to multiple trend line theory whenever you have more than 3-4 trend lines the market is ready to correct.  Thus these 5 trend lines indicate that a very serious inflection point was reached.   Each trend line provides very strong support and when taken out it usually provides an equal amount of resistance.  Look at the 4th up trend line, it was 1st taken out in 2003, then the Dow rallied even higher and put in a 5th up trend line. This 5th up trend line did not last long and the correction was so strong that it took out 2 trend lines (5th and 4th) in one shot. 9 out of 10 times a market mounts a rally as soon as it breaches one trend line, that's exactly what took place the 1st time this occurred in 2003 and that is why this massive correction, which started in 2008 and ended in 2009 caught everyone by surprise because it broke through 2 trend lines with extreme ease before it bottomed out.
Note the 3rd trend line was almost tested before the correction suddenly ended. This pattern is suggesting that the depth and intensity of the moves are going to keep getting more extreme in both directions.  The current rally is one of the strongest the Dow has ever experienced in such a short period of time.
The intensity is picking up with each downward move; in the 1st move which ended in 2003, the Dow dropped roughly 1000 points below the 4th trend line before rallying. In the next correction which started in 2008 two trend lines were taken out. When the 5th trend line was taken out the correction actually picked up steam, slashing through the 4th and almost touching the 3rd up trend line.  It also dropped almost 2200 points below the 4th trend line. This is double of what took place in 2003. Could the next move be a move all the way down to the 1st trend line?  Our tools and indicators should flash several warnings in advance of this development, which will help us position ourselves accordingly if the above scenario comes to pass.
For the record, we are not yet officially calling for the Dow to pull back to the 1400-2000 ranges, at leas not yet, but we are stating that there is a very good chance that we have not yet seen the worst.
What we are stating is the following.
Multiple trend line analysis indicates that the intensity of each downward move is picking up steam.  As such events occur in sets of 3; we have at the least one more downward move to contend with.  It also states that eventually the main up trend line has to be tested. As this is a very long term chart, it does not mean it has to occur right now. However, if consumer spending drops as we think it will drop then in several years, there is a possibility that this could come true.  Now there is a big outside factor; this is what trips most individuals for they seem to focus on absolutes.  We believe that the dollar is going to lose a huge amount of its value in the years to come.  Thus in present dollars the Dow might actually hit the 1400-1600 ranges, but if the dollar starts losing its value at a very rapid pace then the Dow would have to compensate for this loss.  In other words, one would have to adjust the value of the Dow to take inflation into consideration to get the true value of the Dow. This is why we stated in one of our articles several years ago that even though the Dow had rallied all the way to 14,000 2007, it had actually put in a new high much earlier. In an article titled Dow 14660 has come and gone we explained how the Dow actually put in a series of new highs starting from April 2000 and culminating in April 2001 when it traded as high as 14660.
Currency movements have to taken into consideration as fixating on absolute numbers is not the way to go. We have no absolutes now as money has no fixed value other than the value it is assigned randomly because of trust and or faith individuals have in their government’s ability to maintain its value.
The key thing to look for is extreme fear, and madness.  When fear is running extremely high it's always a good time to buy. 
If by some miracle the Dow traded into the 1400-2000 ranges, it would be screaming buy of all screaming buys, and it would be prudent to jump in with both feet and start loading up like a madman on shares.   This is the opportunity that 100% look for but 99.9% miss. Please do not fixate or dream about this target for it will cloud your vision of what is going on now.   No one thought that the Dow would fall from 14000 to 6449 so one should remember that nothing is impossible.
As we stated several times in the last 2 months, there are subtle but not fully confirmed indications that the Dow could potentially trade to 12000 and in doing so will probably offer a perfect set up for a horrendous correction and a repeat of what took place in the 1929-1930's era.
Look at which range the 4th up trend line runs through.  It's 12,000 and so we have yet another subtle confirmation of the Dow possibly trading up to the 12,000 ranges.   As the Dow is now trading above the 3rd up trend line, there is a very good chance that it will at least test the 4th up trend line, a zone that once provided strong support.  The half way point between the 3rd up trend line and the 4th up trend line is 1500 points (12000-9000= 3000 and divide that by 2). Thus we would need to see how the Dow is acting when it trades past the 10,500-10,800 ranges (our initial top side targets issued back in Feb 2009) as it will most likely provide some early clues as to whether the Dow is going to make it to 12,000 or not.
Something to keep in mind
Remember nothing falls in one shot, there are always going to be massive counter rallies and during such rallies its not wise to hang onto short positions; case in point, the current rally from March 2009 has wiped out many bears.
Some facts on Gold
Gold has put in a new 52 week high every year since 2002. This is a perfect example of a bull market running on full steam.
Gold took out its all time high set back in the 80’s and has continued to trade higher, while the Dow after putting in a fake high in 2007 did nothing and then in 2008 it broke down and plunged all the way to 6469 before bottoming. When adjusted for the stronger dollar the Dow as mentioned earlier put in a new high in April of 2001 and since then has been trending lower.
Gold broke out in later 2002 and since then is up roughly 333%; the Dow is showing a pathetic gain of 33% in the same time frame.
If we perform a similar test on other hard assets we find that they have performed equally as well and some such as Silver have actually done a lot better on a percentage basis.  Commodities in general have more than compensated for the wholesale destruction of the Dollar, showing gains in excess of several hundred percent.  The Dow, on the other hand, when adjusted to reflect the drop in the dollar has produced a negative rate of return. 

I believe that in the history of art and of thought there has always been at every living moment of culture a ''will to renewal.'' This is not the prerogative of the last decade only. All history is nothing but a succession of ''crises'' -- of rupture, repudiation and resistance. When there is no ''crisis,'' there is stagnation, petrifaction and death. All thought, all art is aggressive.

Eugene Ionesco, 1912-, Romanian-born French Playwright

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