Dow Déjà vuThe Dow Jones Industrial Average is the all important market index which the world looks to as its' barometer of economic prosperity. It is not the most representative US market index, but still most people refer to the Dow when they are talking about 'the market'. Many people who do not follow the markets on a regular basis still have a pretty good idea of what the Dow is doing. Maybe they do not know the current exact index value of 8745.45, but do have a general idea that we are around 8000 or 9000 on the Dow. We are constantly reminded of it at the top of each hour on most national radio programs, daily newspapers and TV networks and top websites as well. The number itself is much more than an average of 30 top blue chip stocks. It has psychological significance and gives people a general idea of how well the economy is humming along and where things currently stand.
Right now people really want to know where the Dow is going and if we are at a major bottom or not yet. In fact many are calling current prices as forming some sort of significant bottom. By many technical measures, the Dow does seem quite oversold. During the previous 20 years, technical indicators would indicate oversold levels at major bottoms. They worked quite well during an overall secular bull market. The problem is if we are now entering a period of persistent bearishness, most technical indicators will lag prices. A period of persistent bearishness, 1929 being the best example, is just like having a super strong bull market in reverse.
Take a look at Chart 1 below, a super long term chart of the Dow going all the way back to 1900. The chart is plotted on the yearly scale and has very long term implications. Chart 1 below actually looks quite opposite to Chart 1 in my previous Gold outlook piece.
The most important thing to observe in Chart 1 is the top indicator portion where there was a bearish crossover of the 80th percentile line. 1929, the late 1960's and now 2002 are the 3 main crossover points. Note that in 1929, at the point of crossover we were only 2 price bars into the decline. Looking at 2002 there is a somewhat similar situation. We are right at the point of crossover and it would seem to suggest that at least 2 more years of price declines are likely. Just because there is this yearly crossover on the oscillator does not necessarily mean that the Dow will crash or plunge immediately. Look at the late 1960's and you can see that flat to declining price trends also eventually moved the oscillator into a semi-oversold level.
Probably the most confident prediction that can be made from Chart 1 is that flat to declining prices are ahead for the Dow for the next few years even if we do have substantial counter trend rallies to the upside.
The next chart below, Chart 2, is interesting because it zooms in a bit closer to the 1929 daily time frame with volume.
It is somewhat debatable whether or not we had a true head and shoulders top during the 1929 market, but nevertheless there is a major support/resistance line as shown above. There are 3 major items to note in Chart 2 above. Try to keep them in memory before you look at Chart 3.
First is the Spike Panic Volume accompanied by the panic price declines that have often been referred to when we talk about the 1929 'crash'. This was an astounding amount of volume relative to what the average volume was in the years before. It was surely a panic by all definitions.
The second important thing to note in Chart 2 is the high volume price break through the neckline to the downside, clearly a bearish implication. Then, note how prices attempted to rally back up to the neckline twice (double re-test) on LOWER volume. Just when people were hoping some sort of a bottom was in was precisely the time they should have been thinking the exact opposite. As we now know they were unable to move prices above that neckline with substantial volume that was necessary to keep the old trend intact. This period was a defining moment psychologically. It was the ultimate pivot point.
Now turn your attention to Chart 3 below which is the current Dow chart daily prices. At first glance you can immediately see some similarities to the 1929 price and volume behavior.
There are some portions of pattern similarity but the most significant similarities have to do with important price volume trend line tests and breaks. The labels are basically the same as in Chart 2, spike panic volume combined with price, volume break through neckline on high volume, and finally low volume rally back to neckline. Note also the time frame similarity with both initial spike panic lows occurring in September time frame and now the retest of neckline occurring during August to October time frame.
Caution is in order when trying to make conclusions about the similarity of the patterns here. Just because both chart patterns seem to be following on a similar path does not mean the current Dow will also do a double retest under the neckline and then plunge into October. However, I will say tremendous volume is necessary for us to legitimately break above our current neckline and as of yet we do not have it. On the contrary we have declining volume on this re-test. It is too early to tell, but the current month's price action may be forming a rising wedge which would be bearish. That pattern would be similar to what happened in 1929. One or two months more of prices will paint a clearer picture on the pattern.
The last chart below, Chart 4, plots daily Dow prices for the period 1900 to present against the coppock curve. The coppock curve is simply an oscillator, which uses price percentage changes relative to last year to make a determination of its direction. Many people perceive markets in terms of last year's percentage total return and that is what this oscillator interprets.
The key thing to note about Chart 4 is the fact that the coppock curve has trended within a definable range for over 100 years. 1929 was one of the few times when the oscillator severely broke though this range marking persistent bearishness. Right now in 2002 the coppock curve is still a ways away from where other true market bottoms were formed. It remains to be seen whether this bear market will enter the 'danger zone area' similar to what happened in 1929.
What are we to conclude from this analysis? Don't fight a long-term trend. Put your money where the bull market is. Gold.
Thomas R Carreno
August 13, 2002
Thomas R Carreno is a self-taught market technician with over 8 years experience analyzing stock, index, and commodities charts. Tom specializes in finding market divergences that offer the highest probability trades over intermediate and longer-term time frames. His new website, BestOnlineTrades.com is a newsletter oriented Technical Analysis site that is currently devoted to covering most popular gold stocks. Email:
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