Thursday 12/3/09

Picture

Each month, I give my dog a bath. After the bath, she shivers because it's cold inside and her fur is wet. Yet when I eat lunch, she sits there waiting for me to give her an ice cube, like I do in the summer (I eat soup). She thinks it's food.

width=25

Pictured on the chart is the Dow industrials on the monthly scale. It's not a scale that I use often, but it can provide clues to the longer term trend.

My eye is drawn to the rise starting at A. Why there? Because it begins a straight-line move up, just like the recent move from C to D.

Look at the slope of the AB move compared to the CD climb. They are similar, aren't they?

Notice how price flat lines like a dead animal, from B to G. The two green vertical lines show the span of that flat period lasted about 2 years. Price dipped in between, retracing a portion of its gains before climbing to G. After that, the move continued higher to E.

Now look at F, which highlights the price movement circled in red. Notice how the B to G move stopped at this level, about 11,000.

What this tells me is that overhead resistance will stop the Dow's upward move soon. We will trend lower going into spring and probably into summer while the commercial real estate market problems because apparent as the next crisis. That will take time to fix and we could mirror the 2-year move from B to G. After that, the Dow will climb to the price level of the old high at E.

To put it another way, we have had a long (in price terms, not time) move up and the market should consolidate its gains (pause with a sideways to down move) for a while. That sideways move could last 2 years.

For those of you that are wildly optimistic, the Dow could just continue moving higher in a straight-line run up to E, forming an unconfirmed double top. The idea behind such a move is a regression to the mean. The market will recover to what it was like before the financial crisis started (to E, in other words). I don't know of anyone that expects that to happen. In fact, many are expecting a retrace to drop the market. As the chart shows, I do expect the Dow to fall, just not that far (meaning a slight dip as the B to G region shows).

And I was really hoping that the bull market would last a bit longer, and I could afford to feed my dog something other than ice cubes.

width=25

-- Thomas Bulkowski