A lot of you are asking me what happens once stocks bottom, and will it be a buyable bottom? As far as the bottom itself is concerned, I had originally given two possible price targets in the Dow: 9,913 on the high side and 9,063 on the low side. As I type at 12:10 pm EST, the cash Dow is trading down 445 points at 9,880 and has spent the better part of two hours below 9,913. The ease with which the Dow moved below what should have been good support at 9,913 indicates to me that we’ll head lower, so I have to look at 9,063 as the target for a likely bottom. Besides any substantial leg down will end with a real selling orgy, and we have yet to reach that point. Lowry’s buying pressure continues to decrease, while Lowry’s selling pressure hits one new high after another. Right now, I would not bet that 9,063 would hold and think it is possible to see a pair of sell-offs that would exceed 1,000 point declines respectively. If I am right and that happens, then support is all the way down at 8,146 in the Dow, but it’s all just a guess at this point, and I do not like to guess. I have posted the relevant Fibonacci numbers below:

I was amazed to see that the financial press completely skipped over the fact that on Friday the Transportation Index closed below their January lows, and thereby reconfirmed the new lows in the Dow. In fact, every single major index posted a lower low on Friday, and that is no small feat! There is no doubt now that this is a primary bear market and will last for some time. There is also no doubt that the current leg down will eventually bottom. Assuming I am right and the Dow bottoms at 9,063 the question then becomes do I have something I can buy. Before I can provide an intelligent answer, I need to know just what kind of a bottom I am making. It is my belief that any secondary reaction will last no less than 15 days and

no more than 60 days. The fact that the Dow is now entering oversold territory, helps make a case for bottom at 9,063 but I have been around long enough to know that markets can stay oversold for a long, long time. With respect to buying a bottom, I would like to remind you of the immortal words of the legendary golfer Sam Sneed: “There are two things that don’t last very long, golf pros that put for pars and dogs who chase cars”. To those pearls of wisdom you can add one more thing: speculators who go long in major bear markets! I will buy back anywhere from 35% to 65% of my short position, but I will not exit completely and I certainly will not go long. After all, it is a bear market you know.

With respect to the Transportation Index, Friday’s close was seven points below the January closing low, and many wondered if it would hold up. First, Dow Theory does not say that a new closing low must exceed a certain amount of points. An inch is as good as a mile. Any doubts though should have been dispelled this morning when the Transports opened lower and traded as low as 3,845 and are now currently trading at 3,935. I have posted the relevant Fibonacci levels below for the Transports:

The 3,760 support level is important because it represents a 50% retracement of the entire bull market in Transports.

Now to take you in a different direction, life is full of unintended consequences. I try to anticipate all of the important repercussions that could arise from the problems that I have been forecasting for more than two years. I like to humor myself by thinking I am prepared for any and all ramifications. Well, I’m not near as smart as I need to be. I have all of my insurance here through a company called Pacifico, a large Peruvian insurance company. I know they are mostly foreign owned and that always made me feel confident, until now. I had a couple of claims I presented three months back: one for a robbery in one of my offices and another for a health issue regarding an employee. I did notice that they were taking longer than normal with the promised payment, but didn’t give it much thought. Then ten days ago, I received a letter stating that payment was denied for some reason that made no sense what so ever. Being curious I dug a little deeper and guess who owns the majority of Pacifico: AIG that’s who!! It turns out Pacifico now effectively has no reinsurance, so they are denying any and all claims. This is a perfect example of how a US problem spreads to the rest of the world.

Now I would like to close with a few comments on commodities and gold. All commodities are getting a smashing today, and oil and copper are not an exception to the rule. I am looking for oil to drop down to the 78.50 level before we see a chance for a bottom, and copper should fall all the way down to 234.00 before we can breathe again. Commodities in general are oversold, but I still don’t think we’ll see a decent rally for a week or two at the very least. Gold is another story though as the December gold futures contract is trading up 30.00 dollars at 868.00 as I type. Gold’s road has not been easy, as it is being restrained by intervention as well as deflationary pressures. On the other hand, it is in a bull market and smart money buys gold in an effort to protect their wealth. It is no accident that gold is up today, while stocks and commodities flounder. Many are concerned that gold has made what appears to be a third lower low, but quite honestly I think they are mistaken. I tend to see gold as quite strong as long as the December contract does not close below 827.20 and that has not occurred. That is the 50% retracement from the recent 909.00 closing high down to the 745.50 closing low. I am convinced it will hold and gold will march higher. To my way of thinking, gold is now being compressed into a tighter and tight-

er trading range as I have highlighted in the daily chart above. This is a bull market, in spite of all the publicity to the contrary, and I would like to remind you that in a bull market price compressions stand a very good chance of breaking out to the upside, and gold will not disappoint. I can say without reservation that gold is the absolute best long term investment that anyone can make in today’s world. Right now it is cheap, and deflationary pressures could make it even cheaper over the short run, but gold is to be bought and accumulated whenever possible. Time will see to it that you are properly rewarded for any momentary sacrifices.

[The Dow traded down more than 800 points just before 3 pm before rallying into the close. It ended down 369 at 9,965 and still has to go lower. California and Massachusetts need emergency financing now and New York and Michigan will be next. Then you have companies like GM, Ford, and GE who need tens of billions each. The list is endless and we are much closer to the beginning than the end. If you are short the Dow; sit tight!]

ebo@dtanalysis.com

Dow Theory Analysis SAC

Oct. 06, 2008