“It’s not timing the market but time in the market”. Yep, we’ve all heard this refrain from market commentators on TV disguised as experts. Some go even further saying it’s impossible to time the market. Well, what a load of codswallop! Anyone that says this to you is a happily oblivious member of the Flat Earth Society (FES). Sure, FES members can still function well and be successful in their one dimensional world. Ignorant bliss can be extremely satisfying. However, in the analysis I’ve undertaken of the Dow, there is clear evidence presented that the market can, despite the naysayers, indeed be timed.
Let’s leave the timing aspect aside for the moment and using my top-down analysis approach begin with the yearly chart.
That massive upmove in 2013 absolutely slaughtered the bears, possibly close to the point of extinction. Claws holding white flags of surrender were raised. Just the sign required that a significant top is close at hand. A big, positive candle such as the 2013 candle should normally see a little follow through action which we are experiencing right now. The 2013 high was 16588 while currently the 2014 high is north of 16700. Years of looking at charts has shown me that big candles like that generally need to be consolidated which may involve just a simple correction, which we have already seen, but can often be a reversal of trend. In a moment we’ll move on in a bid to determine which scenario is more likely going forward.
Before that I wanted to do some more long term work. I have added Fibonacci retracement levels of the whole upleg from the 1974 low of 570 to the current top. Now I don’t think we’ve seen the final top but I expect it to be only marginally higher so using the current top won’t have any significant effect on this analysis.
Firstly, we can see the 2009 low is close to the 61.8% level bottoming just under that level. (Using Fibonacci in this forward looking manner is a way to predict future tops and lows). This adds significance to that low and is an argument against the megabears predictions that the 2009 low will be taken out. My personal opinion is to look for a low around the 50% retracement level which is currently just above 8650. The 50% level is also one of Gann’s key levels. Another of Gann’s discoveries was that lows are often 50% of the high price. Currently, 50% of the high price is a bit above 8350. Of course, as the Dow rises higher so too will these Fibonacci and Gann levels.
My personal opinion is that the coming plunge will see most, if not all, of 2013’s gains wiped out before a rally into the end of the year. Then an even more bearish 2015 before final low in 2016 close to the levels I just outlined. Now this, of course, is purely speculation on my own part.
But we’re getting ahead of ourselves here. Let’s slow it down and move onto the monthly chart and see what that tells us.
This chart is very revealing. Firstly, I have drawn trendlines from consecutive lows starting from the March 2009 low, then the October 2011 low, the November 2012 low and finally the February 2014 low. It can be seen that each new trendline is getting steeper and steeper. We are now onto the fourth consecutive steeper trendline. That folks, is undeniable evidence that the bull market is in its last throes.
Secondly, I have added a Relative Strength Indicator (RSI) whereby a downtrend line can be seen. This shows that the recent Dow tops are declining in strength. A bearish divergence. Generally after the third bearish divergence a significant down move can be expected. (There’s the magic number three again.) We are now just awaiting the next Dow high to coincide with a weaker RSI reading than its previous two tops. Now keep in mind we are dealing with the monthly chart and the longer the timeframe the stronger the indication.
You will also notice I have drawn horizontal lines on the chart which refers to the levels of the 1998 high, 2000 high and 2002 low. Assuming the bull market since 2009 is just about finished, I wanted to look at potential correction ending levels. As Gann noted, old tops often become support in the future. So that brings into the frame the 2000 high of 11750 and the 1998 high of 9367. Now going back to the yearly analysis, the 2000 high appears too high. Sure there may be a short term reaction off that level but I still favour a lower level for the final correctional low. That brings us to the 1998 level. Corrections generally push into the old high levels giving them a decent test so we could assume a little below this level. That would also conveniently be close to the Fibonacci/Gann 50% level and Gann’s 50% of high price level as mentioned in the yearly analysis. Now if the 2002 low were to be taken out then the probabilities of breaking the 2009 low would increase dramatically. While not out of the question, it is a scenario I just don’t favour at all to be quite frank.
Let’s move on and view the weekly chart……”