Dow Jones Industrial Average - tag category postings

I don’t know why I got so obsessed with deflation.  Inflation Deflation Disinflation, it is all just one big confusing mess to me.  I think I can understand why they sometimes refer to the field of economics as the ‘dismal science’.  It is such a complex science and the variables seem to change all the time and probably most economist predictions turn out to be wrong.  Is it even fair to compare the economy of now to the economy of 1930’s?  Isn’t that sort of like comparing apples and oranges?

I must admit I became really obsessed with the deflation scenario in recent months.  Several months ago I had a pretty firm conviction that we were in a mid 1970’s type market environment.  Now I am starting to open up my mind again to the mid 1970’s scenario time frame and throwing the deflationary depression scenario into the garbage can.  I am not fully switched over but I probably will be soon.  It will depend on certain levels being reached and the overall character of the market action in the days and weeks ahead.

I think it is safe to say that the elliottwave folks are in the deflationary depression scenario looking for much lower prices perhaps in the DJIA 1000 range into the next 6 years I believe.  It is also somewhat widely known that there has been a comparison made between the 1929 crash, then the 1930’s rally and then the follow through collapse into 1931 and beyond.

No disrespect meant to the elliottwave folks (they have a lot of clout and probabyl a HUGE subscriber base that influences a lot of trading bloggers and other market participants) but I am really starting to wonder right now if it is even a valid comparison to make between the early 1920’s run up to 1929 and then the 3 year collapse into 1933.  I really do not think it is and is maybe a misguided approach and invalid.  Be very careful about getting married to a deflationary death spiral scenario where you feel that market must break the March 2009 lows and cascade down as was the case in 1930 to 1933.  For those who like to trade, it is very important to keep a flexible open mind on longer term market direction.  Often times it is the very subtle hints and clues that determine the ultimate longer term direction of the market.  I mean why can’t we just stay in a disinflationary period instead of a deflationary death spiral ?  Seems possible to me.

We have been in an enormous sideways trading range since the year 2000.  So basically we have been in an almost 10 year bear market already.  From the year 2000 to the year 2007 we did not go straight up in persistent fashion as was the case between 1922 to 1929.

So the entire context of our current market is very different than that time frame.  If I had to make a comparison to a previous market structure then the 1967 to 1975 market periods seems much more valid to me because it was a similar sideways bear market with an enormous trading range with an in between huge 2 year bear market decline into 1975.

The decline from 1972 to late 1974 had a similar structure in terms of time and pattern and depth.  It was also similar in that the final swing lows during September 1974 slightly pierced early 1970’s support but then closed back inside the range.

Unfortunately the time scaling in the two time periods is not correct but you can still get the basic idea of what I am talking about.  You can see the 10 year bear market duration.  Then the recent 2 month correction and in the case of the mid 1975 period a new rally that went almost back up to the all time highs!

The decline in the sp500 that started at end of April 2010 so far has lasted about maybe 2 to 2 and 1/2 months and it has been at a total depth of 14.6% from the intraday highs in April 2010 to the intraday lows in June 2010 and also a .382 retracement.

The corrective decline that began in July of 1975 and ended in September of 1975 had a total depth of 15.5% and was close to a .382 retracement of the previous rally.

The chart above pretty clearly shows the possible dynamics of what is going on here.  This seems like a much more valid comparison than any 1930’s scenario.  I am not saying that the economic factors are similar to 1975, just the chart structures and the current turning points. 

I forgot to draw in the 50 day moving average and the 200 day moving average in the chart above but they show a similar stance in both time frames.  And it is interesting to note that in 1975 the 50 day moving average was moving down at a very rapid pace almost certain to cross the 200 day moving average on the downside but it only briefly touched it and then SHOT UP LIKE A ROCKET and completely evaded a bearish death cross.  The only way it was able to evade the death cross was through a very rapid and steep price advance that wasted no time.

In the current time frame of 2010 we already know that the 50 day moving average has officially crossed the 200 day moving average giving a confirmed cross.  The market can still change the configuration of the two moving averages by doing exactly what happened in the 1975 period – a steep and persistent rally the recovered a lot of lost ground FAST.

Everything I just wrote in this post is still on the condition that we do not break down below the recent lows and go deeper past a .382 retracement.

Finally here is the super long term QUARTERLY candlestick chart of the sp500.  Note that the April 2010 highs where the sp500 stopped was consistent with resistance ranges and the recent decline stopped consistent with supportive ranges particularly back to the 1998 period.

The key thing about this long term chart is the MACD histogram which is still showing a rising slope and that the current market wants to trade higher after the recent 2 to 3 month consolidation.

Clearly the quarterly price chart is extremely long term and is like a massive oil tanker.  It is very hard to change its direction once a certain amount of momentum is achieved.  It is at least potentially a very important massive bull market signal.  But even if I am correct and we do trade back up to 1400 to 1500 range, I still feel that market will fail there from heavy resistance and succumb to another bearish quarterly triple M signal.

The quarterly MACD is starting to curl up may lead to an eventual bullish cross just as was the case in the mid 1970’s quarterly MACD.

And finally one last important point.  The Quarterly MACD crossed to the downside on June 30th, 1930 and crossed to the upside on December 31st, 1934.   This is just one more reason why the comparison is most likely invalid to the 1930’s scenario.

In the Near Term

What may happen in the near term is a bullish move to the .618 retracement of the entire bear decline.  This is what happened in the recovery rally of the 1975 period and would put us in terms of the DJIA near the 10600 to 10700 range which would also correlate to the top of the expanding triangle formation.  It could be quite a persistent rally up to that point given the current apparent bullish divergence.

I repeat… be very careful about assuming that stock prices must go down into a spiral as was the case in the 1930’s !  The correlations do not seem to match time wise.  Those who are talking about a total collapse below the March lows and 30% unemployment etc. etc. should seriously consider comparing the 1970’s period as an alternative.

A flexible open mind is key!

I thought it interesting that the price breakdown from the 1930’s automatic rally began on almost the same date as our current break down in Mid April.  Also the first leg down was about –12%  and that matches our break down into May 6, 2010.

The second major leg was a –23% drop.  Note also the nice round beginning decade number of 1930 and 2010.  I am not sure what to make the the similarity in the dates of the breakdowns, perhaps there are some cycles that attach the 1930’s peak with the 2010 peak.

I think the most interesting thing about the price action that occurred after the automatic rally ended in 1930 was the the subsequent price drop was not really a crash it was just like a boulder tumbling down the mountain with a few small pauses but eventually getting to its final destination.

I really am not sure what is worse.  A quick sudden multi day drop or a drop that is spread out over 10 to 15 days.  The drop that is spread out over time would maybe seem less worse since it is less sudden and would seem like normal corrective action to those who do not look at price charts.

Note that after the market bottomed out in June July Time frame it bounced around but then proceeded to get hit bad again during the seasonally weak September time frame.

So we could be dealing with a market that is much lower than is even imaginable by the end of this year.  The tricky part is that it will seem to be happening in slow motion which will probably keep many people buying dips always thinking it is the final low.

Breaking news development… The Dow Jones Industrial Average as well as the SP500 Index are currently as the time of this posting showing another potential bearish implication candlestick formation.

The formation is the bearish hanging man candlestick.  This candlestick looks like a bullish hammer, has a small body shape and a tail that is at least two times the size of the body.  In addition, the upper shadow is preferably minimal or non existent.

The Dow Jones Industrial Average is the index that is currently showing the best likeness of this potentially bearish candlestick.  The SP500 also currently has one somewhat less ideal than the Dow, and the other indices do not have one at all.

This candlestick can at first glance look quite bullish but the issue is where it appears in the trend.  If it appears after a severe decline then it is a bullish hammer, but if it appears after a straight up move like we recently had then the bias is bearish interpretation.

It is significant in my opinion that this potentially bearish hanging man candlestick is forming 4 days after we had a gravestone doji candlestick on the DJIA and a couple other indices.

The hanging man candlestick is useless without confirmation.  And I should not that the final formation of this candlestick is not done yet.  It may change enough by the close today to make it invalid.  But at least for now it is keeping the proper shape.

What about Bearish Confirmation ?

Bearish confirmation of this candlestick would occur if and only if tomorrow, the last trading day of this week we see either:

1. A gap down in the SP500 (The DJIA does not gap) below today’s real body or below today’s entire candlestick.
2. A bearish black body closing candlestick that closes below today’s real body or engulfs today’s body or entire candlestick.

Hanging man candlesticks do not guarantee a huge change in trend.  A huge change in trend could be occurring, however the proper interpretation is that they imply either a change in trend or just a pause in the current trend.

If I am correct, and the hanging man candlestick is confirmed tomorrow, April 1st, 2010, then it would be very very important for the Dow Jones Industrial Average to hold 10,730 (and the corresponding levels on the SP500).

If it does not hold that level then we could be dealing with a dangerous 2B sell signal similar to the 2007 stock market top.

Everything I am looking at right now in terms of candlesticks, astro, and a few other factors says we are approaching a violent change in trend.

The jobs report is out on Friday but the market will be closed all day.  One would think with all the census jobs we will get a blowout number and the bulls will be gapping the market up 400 points out of this range?

I would be the last one to say that is impossible, but right now in terms of the probable, the market is speaking to me and it is telling me possible violent downside action is coming and the bulls will be tested and put the challenge of trying to defend the 10730 level on the Dow Jones Industrial Average and corresponding levels on the other indices.

A gap up and close up above the hanging man candlestick would invalidate this bearish signal and simply say that the only signal it was giving was a pause signal, not a change in trend.

A runaway train is the best metaphor I can come up with right now to describe this market.  It just keeps going and going and going and the good news just keeps on piling on as well.  So it seems to be a compounding cycle of good news and more rallies.  It seems like no one wants to sell their beloved paper shares of XYZ stock.

I can’t seem to remember the last time the overnight S&P Futures were actually DOWN and then started the next day DOWN.  It is almost as if the S&P futures are simply not allowed to be down anymore.  That is what it feels like.

The 60 minute chart I posted in my previous post is not acting like it wants to evolve into a confirmed pattern.  In fact it will probably fail tomorrow.  But if it does not want to fail then it will give an early signal of that by breaking down below the minor hourly uptrendline of the past 9 or 10 hours of today’s market action.

But I cannot help also but see price climbing along a demand line and sitting right under resistance sort of resembling an ascending triangle formation.

So we could just as easily see a northward breakout tomorrow in which case the market will probably hit new 52 week highs again going into end of month.

So I am not giving up hope yet on a corrective leg beginning, but at least as of now and based on the daily and hourly indicators, I see no imminent signs of one beginning, but I am still long the Direxion Daily Small Cp Bear 3X Shs(ETF).  Right now based on the closing price of the TZA, it is about 5% from the previous all time low of 6.70.  So I may have to take that loss if and when we get down there as a result of a bullish market rally.

Perhaps the market will be put in a bad mood tomorrow on the Consumer
Confidence Numbers at 10 am ?  Hmmm.  Tough Call. I have seen a bad consumer confidence number reading take the market down in the past at least a little bit.  But there is so much good news that is coming in now one has to wonder what the next piece of ‘bad news’ will be and when it will come ?

But we also have a holiday ending week this week and the volumes today were extremely light.  So it seems hard to believe huge volumes are going to come into this market this week.  In addition there is end of month and end of quarter window dressing which may keep the market afloat.

So, to sum up…

If the DJIA can manage to go down tomorrow and stay down below 10890 then it would at least keep this little hourly head and shoulders pattern alive and give the market a chance of turning into some type of more involved mini correction.

But if not… then maybe more new 52 week highs again and again…

Don’t give this chart too much credit because it is only a 60 minute candlestick chart of the Dow Jones Industrial Average and may invalidate in just an hour or two.

But I could not help but notice at least a possible head and shoulders topping pattern on the Dow Jones Industrial Average.  If the pattern works out then we should see a break of the neckline in the next day or two and then a target of the 10,700 range.

For this to keep working, we really ought not to see the DJIA go higher than 10,916.49 from the date and time of this post until the end of trading today.

Could it be that this simple intra-day pattern is marking a very significant top in the markets that will result in a follow through similar to the 2007 time frame ?

We won’t know the answer to that question until much later this week probably, but it is awfully tempting to believe that this little head and shoulder pattern will work and confirm my 2007 – 2010 stock market price structure similarity…

It is 12:38 PM right now, so several more hours to go until end of day.  Right now the DJIA is trading at 10,891.70, and there are about 3 more hourly candlestick bars that need to show up in the chart above…

So lets see how it looks at 4PM…

Thomas Bulkowski of the pattern site thinks the DJIA could be close to entering a 2 year correction starting pretty soon.  It is a nice post and lays out a few arguments why this may be the case.  After that he says the market could take a shot at the old highs.

In general I agree with him. We are getting close to the time for an extended correction.  Whether or not it will be two years long is unknown to me.  I was thinking earlier that it could be maybe 6 to 8 months long.  Either way a sideways to down correction like that would go a long way towards working off the overbought condition of the market and help build cause for the next move.

In other news I am keeping an eye on SQNM Sequenom.  It appears to have a nice ascending triangle and might get some kind of run going next week.  But on the other hand looking at the history of the stock the ascending triangles have not proven all that reliable and it is worth noting that SQNM is a biotech stock and has shown some very wild and scattered price action in recent years. 

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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

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.

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Ahhh, the beauty of swing trading.  I believe the Dow Jones Industrial Average bottomed today.  Now I could show you a bunch of indicators and oscillators and all sorts of other fancy criteria… but sometimes in life you just need to keep things simple and stick to the basics right?

Well the above chart is pretty basic. It simply shows that the Dow Jones Industrial Average has moved down to the support area of this down trending channel.  You have heard me mention before about how extremely oversold this market is.  I don’t care how bad the news is, oversold is oversold.  So after you get oversold you usually get a good reaction to the upside especially if you are hitting the support of a channel that was hit two times previously.

That we closed up today on a Friday is pretty encouraging.  Plus you also still have Larry P’s positive astro aspect that kicks in this weekend. So next week could potentially be a very big up week, perhaps even in a one or two day deal that moves us up 1000 points or more.

Whether or not this is the final low for a long time remains to be seen.  I have indicators that will tell me when we are in much safer territory for the longer term. But for now and for the intermediate term we must deal with this channel.  As long as we continue to be bound by this channel we will remain in a downtrend.  If my predicted really gets going now then we should be looking for high 7000 to very low 8000 area for clues on whether we will break out of this channel and power even higher in a sustained upward phase. 

I think a lot of answers will be forthcoming in the next few months that tell us for sure if we are in a 1974 style or 1929 style bear.  As I mentioned before I think this will be a 1974 style… and that would mean the upcoming rally could be very large indeed.

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!