A Technical Look at the Dow Jones One Year Later
November 12th, 2008 by Leonard
The Complex Head and Shoulders Top
Well…Here we are. Almost one year has past since we saw on this website, a bearish Head and Shoulders Topping Pattern on the Dow Jones unfolding. I drew the pattern on November 19, 2007 projecting out about 7 months into the future as to how it should look.
The market took on that shape that was drawn, and has met all of the downside price projections except one. It has yet to complete the downside price projection to 7371 on the Dow Jones based on the overhead complex Head and Shoulders Top that has formed.
Accelerating Deflation
The path of accelerating deflation is as much a fascinating piece of history as it is an emotional profile of the masses.
The elections were emotional and intense matching the fury of volatility that the market unleashed over the last several months. It’s been taking a breather lately. Commitment levels are low for the bulls and bears. Traders may be resting, but more likely confused as to where the market wants to go next.
No Bottom in Sight Yet
It is too early to call a bottom, but you will hear that the market is forward thinking, and that it will rally many months before an economic recovery takes place. This statement is actually true, but it is only true, just once.
All along the littered path of losses you can see where failed former rallies have been. Was the market being forward thinking at those times? Or were traders still pining for the good old rally days?
The Market Action
The actual acting out of the trading drama this last year has been a process of stripping away pretense and hypocrisy. It’s as if every week some economist, TV pundit, or groups of economists, is suddenly surprised at a negative economic report, or that a bank is in trouble, or that a giant corporation is going down. There is a never ending request for money from the government to plug up debt losses and to save corporations.
Government intervention has been creating temporary trading plateaus that end up being cliffs from where the market falls.
Bears and Bulls
A bear market will continue as long as bulls are willing to buy into dips that have not sufficiently discounted negative fundamentals.
When bears temporarily run out the downside course on negative themes, they hibernate, and allow the bulls to develop a bullish framework. The bullish framework could be “let’s build a base” or “let’s get really excited and choose a singular piece of news to prompt a huge rally”. If the framework has weight, then there will be many more bulls wanting to join in on the process of accumulation.
A process like this can eventually turn into a large movement. As confidence grows, the more timid players may begin joining the movement.
When bulls believe that a strong piece of news supports their beliefs, they become more aggressive. You can see the upward urgency in price movement. But part of that move is also driven by wants and hope.
The game then becomes whether the newly formed framework turned movement, can overwhelm the dominant negative fundamentals. If new negative fundamentals continue to emerge, then the rally is cut off, hope and dreams are dashed, and the vested money is lost as the bulls fall over the cliff. Then the market moves down searching for another level of stability.
As the government pulls out heavier financial weapons to counter negative forces, the ensuing price plateaus become larger areas of clashing fundamentals requiring even greater pieces of negative news to roll the market over the cliff. That’s when we get mega surprise surprises and sometimes a capitulation.
A capitulation is a defining moment of exhaustion where the market has discounted current and future negative fundamentals too much.
I do not believe we have seen that capitulation.
When Markets Fall Short of Their Price Projections
A market can fall short of a price projection if the price projection is technically invalid, or if the bulls are too anxious to have their way.
A market that is ready to turn up to form a bottom should have more traders fearing financial loss, than fearing the loss of getting in on the “next big up move”.
What’s the Current Condition
In my opinion the market has been creating a continuation pattern that will help fulfill the downside projections of the overhead Complex Head and Shoulders Top. That price is 7371. It is a minimum price projection.
There are several kinds of continuation patterns. One of the most common is a triangular pattern sometimes called a compression. The term compression comes from the fact that bears are willing to sell peaks at lower levels and bulls are willing to buy dips at higher levels.
Eventually there is a face off of bears and bulls as the clashing fundamentals develop more commitment from each side. A continuation pattern is like a rest stop but generally continues the price movement in the direction from where prices came. In this case down.
It is difficult to predict exactly when but if the pattern remains to be a triangle then typically we will see movement out of the triangle within a month.
Triangles usually break out between half way and three quarters of the way of their development.
Should this pattern change shape, then I will reassess the merits of any new input on the charts.
Layered in the background are Novy Principles of Market Flow that tracks directional movement.
On Thursday November 13, at 4:30 EST I will be conducting a one hour seminar about those principles. You can register at this link. The seminar is free and on-line. http://www.onlinetradercentral.com/presenter_081113B.asp
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