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I have been truly blessed over the last two decades by knowing and speaking with some very prominent traders and analysts. On the occasion of new highs on the $INDU and $COMPX, I began to receive some chatter from these folks, anticipating a major market top and possible reversal coming in mid-summer. Though I trade patterns that I analyze on a daily basis, I tend to look a little closer at things when the chatter levels rise a bit.
I have been busy on other projects, but I decided Friday night to take a look at the index that the public seems most fixated upon, the Dow Jones Industrial Average. Though it only contains 30 stocks, it still seems to capture the attention of the general public, even though it is very far from being a diversified average or overall gauge of market health. Still, everyone watches it.
It seems like Mr. Chertoff and various traders and analysts that I respect are doing the same thing. They are listening to chatter. Mr. Chertoff is listening to al Qaeda intelligence sources, and the analysts and traders are looking at the markets. There are those out there who are comparing the current situation to what we saw in 1987 (that is the huge blow off rally that ended in mid-August of that year, followed by a rapid failure and a huge market implosion on Black Monday, Oct. 19, 1987. Others, like Barron’s Michael Santoli, are worried that speculative margin is at all time levels in May ( at $353 billion dollars) and that we might be seeing later down the road another speculative meltdown similar to the 1999-2000 time frame.
There are parallels. In 1985, the United States decided to begin to let the dollar fall against other currencies. In October of 1987, trade deficits hit near record highs at the time. There was a perceived run in foreign investment in dollar-denominated assets, and over that weekend of October 17-18, there was widespread rumor-mongering regarding a wave of selling (Martin Zweig on Wall Street Week, said he heard rumors that were like yelling fire in a crowded theatre. He literally called the crash, which occurred that very next Monday.
Long bond rates (30 year rates) had risen from 7.6% at the beginning of the year to about 10%. Yields were exceeding the stock market returns of the time (the market was valued at roughly 18.0 times current earnings (that is a P/E of 18). This kind of valuation was virtually unheard of at the time, only once reaching those levels at the end of the Nifty Fifty era of the late 1960s and early 1970s.
In another article I will show you how the seasonality of market action this year is a virtual mirror of 1987. The question is:
Are we heading for another train wreck? The dollar is at all time lows not seen since 1992. Trade deficits are a big item once again, and stock valuations, while not historically high (not anywhere near 2000) could be considered somewhat high given the current rate of interest on government backed securities. Higher rates would compete with the stock market and provide greater risk aversion. Could a weak dollar force the Federal Reserve to raise rates again? The answer is clearly yes, but we will have to see what impact there will be of a further weakened dollar, perhaps as weak as it has been in the last century.
Well, I still say we should take a look at the charts on the $INDU to get a picture of what is going on. Charts are representations of traders’ action, and unless they were drawn incorrectly, they do not lie. Let us see what DST pattern analysis does to give us a picture of targets. To do this, I am going back to Tax Day 1969 (two months and five days before man landed on the moon) to the end of this week, and look at a monthly chart.
Before we get the big picture, let’s look at the first diagram, and show you how the second or third worst bear market in history ended on a bullish XABCD pattern that was almost a Bullish Gartley 222 pattern. In July 1997, the $INDU fell nearly 500 points in one afternoon due to a devaluation of the Thai Baht. That set up a momentum low for the X point. Were it not for A-B not equaling B-C, it would have been a perfect bullish Gartley. The retest in March 2003 did not take out the D point. Patterns work in any time frame and in any market.
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| The Bhat Crisis of 1997 was the X Point |
Targets on the $INDU:
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| Targets can be found in any timeframe |
So, where do we go from here? I have seen a number of analyses being measured from the August 1982 low, but I am a purist. The true momentum low of this great bull market run was on December 31, 1974. That was the all time washout low on the Dow for the month at 570.01. If one uses the momentum high at January 31, 2000 of 11750.28 as the last previous swing high. Then two targets come to mind. The 127.2% projection is 14791.21 by that calculation. The 161.8% extension is 18659.69.
The run up so far this summer has been relatively spectacular, and certainly it is possible that the 14791.21 target is an achievable target based on prior pattern activity in the markets.
Will it get there? Who knows? As traders, we are not so interested in where targets are until after our trade signals have been generated. What is important to do is to see what patterns form around those projected areas so that we know what to do when they show up. Will we see oversold bearish divergence against monthly (or maybe even yearly pivots)? There will be no structure there (as it is in all time high territory, so we will have to look at other strength of signal measures as these tops are hit.
For now, it would appear, based on chart evidence, the only thing traders really have to hang their hats on, that we are nearing a projected market top based on Fibonacci projections. The thing to do now is to look for confirming trading signals, and take action when they arrive. And we based our near-term analysis on data created before many traders were born.
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I believe you are probably the best out of the literal hundreds of traders that I have witnessed.
