Dow Jones Industrial Average Long Term Forecast

Big Picture Stock Market Forecast

It is time to put my finger on the chopping block and make some long term forecasts about where I believe the stock market is going longer term. I am doing this for myself in part just to give myself some clarity about where I stand now and then at least I will have a written framework to compare from down the road. This type of forecast is of course by no means guaranteed. Instead it is rough around the edges and subject to change at any time (consider subscribing to email updates for new perspectives). But again, I feel it important to write about this now since I feel it could be a very important turning point.

For the short term I believe we have made a meaningful bottom. I wrote earlier about how it looks like the Dow Jones Industrial Average has hit support at the bottom of a trading channel. I also wrote earlier about how extremely oversold the market is since at least 118 years based on the monthly RSI. We are even more oversold compared to 1933 based on the monthly RSI level. These factors contribute to a train of thought that says we are going to get an enormous bounce in the broad market that may last longer than many expect.

There is zero doubt that the economy is bad now and the banks are still having trouble. There is enough bad news out there to keep most reporters busy for at least another six months. It is almost fashionable to report bad economic news now, deflation bad housing market etc. etc. it goes on and on! But the news is always the worst right near the bottom and the best right at the top. The endless talk about banks and bailouts and stimulus and the morality of it all on main stream financial and news broadcasts is mind numbing. We need to break free from that mind set and focus on the logic and probabilities of the stock market structure going forward.

There was recently (this weekend) a special section in the Financial Times News paper devoted to “The Future of Capitalism” I have to take a contrarian stance to that type of news coverage. Maybe this headline falls in the same ballpark of the famous business week headline in 1980 of “The Death of Equities” ? I think capitalism is alive and well. We just happen to be in a period where we have a greater number of economic challenges than we are used to having. But nothing goes down in a straight line, and this is key.

 

What about the Long Term Technical Perspective?

From a big picture stock market forecast point of view I think we need to follow what the entire structure of the stock market has been since the year 2000 and try to make some comparisons to earlier periods of stock market history and see if we can find any clues.

The reality is that since 2000 the entire stock market has been in a very large trading range that can be clearly defined by long range support and long range resistance. There are a few key points that need to be made with respect to this long trading range.

Cause Building is Necessary

This first point I want to make about this trading range from the bigger picture perspective is that it is necessary. It is clearly necessary especially when you look at the yearly or quarterly structure of the market since the bull market begin in 1980. The market launched off of a large trading range in 1980 and then basically shot higher into the year 2000. So we had a 20 year price advance coming off of a roughly 15 years sideways basing pattern. The market has used up all of its cause that it has built up during the 70’s. Cause building is an important process that builds energy for the next move. So it used all of it up and peaked in the year 2000. Now it is in the process of once again building long term cause for the next move. I believe that in this case the sideways cause should last until at least 2013 perhaps a bit longer.

Markets need to build sideways cause before they can make their next moves higher. Shorts are blown out and longs are scared out creating large trading ranges and building energy for the next move. This type of action can happen on all time frames and I believe that right now it is happening on a very large time frame.

A key point to make with respect to cause building is that it can be defined by very large trading ranges and violent moves that turn on a dime. I do not think many people are expecting a very large sustainable rally right now. But in this environment it would not be at all unusual. A shift from deflation to inflation and then back to deflation means that we will probably be dealing with very sharp long term moves in both directions for the foreseeable future.

Second key point – The Market is very Cunning

Let’s zoom in on what happened in the year 2007 on the Dow Jones Industrial Average. The Dow was able to make a marginal new all time high above the long term resistance line that began in the year 2000. But then it closed back under this trading range line and continued to decline until the present time.

Can you think of a more deviant way to trick most people? Give them the hope and confidence that a market is make new all time highs, let them get complacent but then quickly take them back under the trading range and quickly plunge to the bottom side of the long term trading range. That my friends is about as deviant as you can get, and that is exactly what the DJIA did in the year 2007. That move that occurred in the year 2007 was actually something known as a 2B sell signal. A 2B sell signal is when a market makes a new marginal high or low but then comes back into the trading range. Many times it leads to accelerated price action because of the nature of the failure.

But now here we sit at the bottom end of the trading range. In 2007 we swung up slightly above the trading range, but now we have swung slightly below the bottom trading range. Indeed I believe there is a good change the Dow Jones Industrial Average will perform the same type of trick as it did in 2007, only this time it will be the exact opposite type of trick. This time it is likely to be a 2B BUY signal. The 2B buy signal would be activated if we close back above and into this large trading range and could ignite enormous short covering over a longer term basis. This would fuel an enormous rally that does a similar move to what was seen at the end of the bear market in 1974.

Think about how deviant that type of move would be! And given the degree of oversold we are know it is looking more and more likely. The 1929 scenario to me is becoming less and less likely. I reserve the right to change that opinion at any time, but at the time of this writing I do believe we will re map the 1974 trading range scenario.

A Near Perfect Repeat of 1974?

Indeed! Let us look at how strikingly similar the 1974 scenario is to our current scenario.

The similarities come in when one analyzes the market in terms of its large trading range and also in terms of key Marty Armstrong cycle turning points. Marty Armstrong came up with a global 8.6 year cycle model that is the most precise cycle model I have ever seen. I have seen it pick very precise turning points sometimes to the exact day. The turning points do not happen very often, but when they do they are usually worth paying attention to for potential significance.

For the purposes of this comparison, try to keep fresh in your mind the long range perspective of this two very large trading ranges. One of them being in the 1970’s period, and the other being our current year 2000 to present period. In BOTH cases we clearly see that the Dow Jones Industrial Average made a marginal new all time high above the long term trading range to trick the masses. The one that occurred in 2007 is analogous to the one that occurred in 1972. I shaded in this marginal new highs and lows in white on the chart.

DJIA19742009

The key point about both of these tops is that each was accompanied by Marty Armstrong cycle turning points. The one in 1972 occurred on 10/1/1972 (marked with red vertical line) and the one in 2007 occurred in 2/25/2007 (marked with red vertical line). Then we saw the market begin their long declines hitting the next turning points at 10/29/1973 AND 3/23/2008 (blue vertical lines).

But THEN in 1974 we did see that the next exact low point was indicated the by the cycle point of 11/25/1974 (yellow vertical line).

So then similarly we now come upon the date of April 20, 2009 (yellow vertical line) which may also mark the exactly low of this bear market decline in a similar way to which the 1974 market was indicated ? It is possible. And what is interesting is that when you look at both market time periods within the context of the structure I just pointed out above (the trading range structure, marginal new high and also marginal new low under the trading range) and THEN combine it with the Marty Armstrong cycle turning points, you get what may be a very powerful predictive combination.

The April 20th turn date is not that far away. It is roughly only 20 trading days away from today.

So going forward the crucial key points to observe are how the market behaves around this turning point and whether or not we are able to close back up above inside the trading range as we did in 1974. Follow us here at BestOnlineTrades for updates on this trading range scenario and if key levels are achieved that keep this scenario intact. The more I look at the chart comparison and the Marty Cycle dates the more I become convinced that the 1929 scenario is less and less probable. Instead much more probable is a massive inflationary wave to come.

Aside from the Marty Armstrong turn point dates similarities and the long term trading range similarities, there exists yet another similarity defined by simple trading range trendlines.

The 1974 period saw what looks like a very large trading range. But if we draw key trendlines on this range we can see what looks like a sort of megaphone pattern or massive broadening wedge type pattern. The key market action in 1974 that contributed to this pattern was the new extension of price under the long term trading range.

We have that now as well since the Dow Jones Industrial Average has managed to move to a low point of 6443.

Looking at both market periods together you see what looks like a similar large megaphone or broadening wedge type pattern. The point in 1974 at the lows was the low end of that large broadening wedge type pattern. So perhaps our current level also marks the low end of our current broadening wedge type pattern? I believe it is very possible, especially when considering the trading range analysis I did earlier combined with the Marty Armstrong turning points.

djiamegaphone

Having said all the above, it seems to be from a broader perspective that we are again going to be dealing with a massive inflationary era, and not a 1929 style 90% decline era. A massive inflationary era would mean huge trading range swings that turn on a dime and swing very far back into the large trading range. If you look at the 1974 period you can see that the recovery swing took the market all the way back up to the top of the trading range and it almost looked like it was going to make a new high again!

We may see a similar type of recovery this time around as well with the Dow going to 10,000, then forming a sideways plateau and then make a challenge on 11,500 which will then likely see it top out.

We will have to see if things play out as I outline above, but the jig is set and I believe it has a good shot at it.

I have a simple indicator I will use that will help define when a 1929 scenario is completely cancelled. I also have an indicator that should tell me with a fairly good degree of confidence that the bear market really is over and a long term uptrend is well intact.

It is absolutely extraordinary to me how many are fearful of a 1929 type decline. I have not ruled it out completely yet. I am going with the scenario I outlined in this article for now. But again this could change at any time!

Let’s see how the April 20th, 2009 turning point plays out and other key events going into the middle of this year…

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  1. […] wrote a piece over at BestOnlinetrades dot com on the Dow Jones Industrial Average which basically makes the case […]

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