1974 - tag category postings

I wanted to take a quick look at the Dow Jones Industrial average again from a longer term perspective and as a quick comparison to the 1970’s period.

If you look at the chart to the left it is clear that in both cases, the 1970’s and the 2000’s we are in a period of persistent downtrend. 

I have drawn two trendlines labeled 1 and 2 to define two different degrees of bearishness.  What we see in the 1970’s is that the Dow accelerated into a more bearish state by following the number 2 down trendline after the initial number 1 down trendline.

But then the market double bottomed and the market was able to rally in an almost vertical fashion, piercing the number 2 down trendline and rally all the way back up the the down trendline number 1.  At that point it just went into a long sideways consolidation and eventually broke out north from that number 1 down trendline.

So now we find ourselves here in the decade of 2000 and again we have 2 different levels of bearishness market by trendlines 1 and 2.  Now it appears that on the Dow we have been able to pierce down trendline number 2.  But right now we are in a corrective phase and it remains to be seen how deep the correction goes and whether or not it is able to hold ABOVE this down trendline number 2 or if it will break back UNDER it.

I can tell you now that if the Dow Jones Industrial Average breaks back down under trendline number 2 and stays under there with no apparent signs of wanting to maintain price above it, then it will be a VERY bearish sign.

My hypothesis for some time now (the last few months) has been that the Dow Industrials are in a very large trading range type market that will see huge swings and could see the Dow recover way back up to at least a pocket under down trendline number 1.

At least for now I have rejected the hypothesis that we are in a 1929 style bear market that will see us continue to spiral lower to 1000 in the Dow by 2012.

But I can tell you right now that the price action for the rest of this year is going to be very critical in determining exactly what my future take is on this market.  I reserve the right to change my opinion at any time. So for now I am sticking with the 1970’s style scenario, but I may change that opinion depending on how the second half of this year shapes up.

Of course any new thoughts I have will be posted right here at BestOnlineTrades.com

My original post on the Dow Long Term Forecast

We are living through unprecedented financial history right now.  It almost seems surreal because I remember having heard so many times about how bad the markets were in 1929 and 1974 but I had never lived through one of them.

But now we are right in the middle of one right now and the cold hard reality of it all is truly eye opening.  Looking carefully at the price charts it really does look like we are doing a bull market in reverse.  If you flip the charts upside down it will look like a persistent bull market. 

But what style of bear market are we in now? Are we in a 1929 bear market that will see the Dow Jones Industrial Average ultimately decline 90% as well ?  The 1929 bear market saw the Dow do about an 89% decline from ultimate peak to final low. If we were to decline 90% from our peak in 2007 it would put the Dow at roughly 1500.  What is intriguing about that level is that it is close to long term 15 year support we had during the 70’s of the 1000 level.

What is my prediction? Well my own take right now is that we will have a 1974 style bear market where inflation start to kick in severely and inflates everything in sight, including the stock market.  In that scenario we could see a sharp and dramatic reversal to the upside in the stock market that catches people by surprise and rallies all the way back above 10,000 on the Dow.

Given all the current negativity everywhere it seems unconscionable to think the Dow could actually get such a sharp rally going.  Marc Faber pointed out a few years ago that inflationary periods in market history can lead to very large, fast and violent moves in markets.  This makes sense and it is very notable.  It makes sense because what you have is a market confronted with so many fast changing variables that it cannot make up its mind which way to turn. It is like a stock market that has attention deficit disorder.

So it is very likely that we will be seeing huge violent swings not only on the daily and weekly time frame charts. But also on the monthly and quarterly charts as well!

In fact that is exactly what happened in the 1974 bear market. It was the end of the world down there and then it turned on a dime and never looked back.

So again, my own take right now is that we are in the 1974 style bear.

But is there a better tool we can use to determine if we will be in a 1929 or 1974 bear going forward? Yes!

Simply focus on the three charts below (which by the way I will be updating over time and alerting you. Interested in email updates of new posts here? click here).

I think the trick in determining which type of bear market we are in can be done quite simply by drawing a down trend line along the lower highs of each bear market.

In the case of 1974 you can see that eventually the market was able to create an upside reaction that decisively broke up and through the down trend line and signaled thereafter that there would be trading range markets and more complex trading patterns in the indices.

In the case of 1929 you can see that the Dow Jones Industrial Average was never able to break above the down trend line until it finally bottomed 90% down in 1933.  This is a key observation because it shows that in 1929 there was extreme trend persistence in the bear market and price was never able to exceed it’s own yellow down trend line.

So what about the current market?  Well it boils down to either scenario A or B. Scenario A is that we continue down a bit more into May or June of this year and then get a rally going that brings us back up to touch the yellow down trend line.  Then, we fail and break down again similar to the 1929 style.

But Scenario B is that after a bit more down move into middle of this year we get a violent upside reaction rally that is able to PIERCE the yellow downtrendline. If this happens, then it will in my opinion invalidate the 1929 scenario.

The fate of our country and perhaps the rest of the world rests on a simple yellow downtrend line! Amazing!