Most of the people I talk to about the markets are still in the “it’ll come back” mode. Obviously, they are not technical analysts, or they would realize the folly of their beliefs. I mean, of course the market will come back. The issue is how much are you willing to lose, and how long can you wait before this happens?
Looking at the above chart of the Dow Jones 3 Year Weekly, it seems obvious to me, even without all the lines and moving averages, that what is transpiring here is monumental. Looking back at 40 years worth of Dow Jones Weekly Charts, what is happening the last 6 months looks much like the Dow of the 70s and early 80s. If that remains to be true, then we can expect more downside, with continued volatility, broken up by long periods of range-bound trading, and then, more downside. Obviously, my eyes are not a quantitative tool, but this top looks much more like a “top” than during the 2001-2003 Dow bear.
I do expect many tradeable bounces, in the mean time. I define tradeable as a rally that lasts at least 3-4 weeks, where breakouts begin to again work in large numbers. I see 10,750 as a likely area for the Dow to find enough support to attempt such a rally. The lower channel boundary will come into play in this area, as well as a previous area of support and resistance.
Cajun noted the other day that the Dow looked like it would break beneath the 200 week moving average. The chart shows that it has broken the 200 week. My historical data shows that the Dow traded beneath this average through most of 1973-1983. As you know, that was a bear market period. The only other time in the past 40 years it has traded beneath the 200 week was during 2001-2003. Obviously, a break of this average should not please the bulls and portends that a very difficult period is upon us.
Over the next week, I am expecting a small rally. The index is tremendously oversold, on all time frames. It would be natural for the Dow will re-test the 11,750 area. Whether it can muster the strength for a 500 point rush is worth considering. I will contribute a little capital, betting that it will bounce a bit, or at the very least, stabilize.
In the end, I will keep trading the bounces, in both directions. However, I am left with the distinct feeling that this market is going to be very challenging, for many many years to come.
excellent as always!
Great post! I agree 100%.
I agree 100%
Louise Yamada is calling for the following targets:
Dow – 10000
S&P – 1175
Naz – 2000
Rus – 600
From today’s levels that would mean a further drop of 11.9%, 12.7%, 8.2% and 13% respectively if my math is correct.
To put it into perspective, that’s a 30% drop for the averages (25% drop for S&P) from peak to trough.
It could in fact be much worse if the U.S. economy unravels and a global recession ensues. In the 2001-2003 recession the market fell over 50%.
louise yamada is a runt
hahaha – louise is indeed a bit of a runt.
nice post, wood. i’ve been waiting to see if we get a bounce tomorrow, or a selloff.
i think the possibility of a downward trending range market is very real for the next couple of years, barring any unpredictable miracles like aliens that bring us cheap oil and burn down everyone’s home.
Shed – I have had something on my mind, care to comment? Of course, I do not have a time machine. I don’t even have a nice time piece anymore. However:
I am thinking the lack of volatility vis the VIX is indicative of the bleeding that is about to occur.
I do not think we will get a sustained bounce; rather, the bleed to DJIA 10k will be slow and steady. Bounces, if any, will be very transient perhaps even intraday.
This will make is difficult to get short on a typical “fade the pop” entry. It will also be far more grim for the retail investor who will likely give up on equities for long time.
Certain sectors may run for a while, so smart money can exit. But the rolling bear market will eventually consume everything.
Is the best strategy is to sell short and hold. The exact opposite of the last bull run. I made so much money last year just buying and holding. Now I may sell and hold.
Thoughts?
This band is getting a lot of buzz in Music City. I really like em. Check it out.
Boomer, some of us have been short and holding since November… where you been?
Here’s an interesting movie of similar provenance?
Really like Birmingham, btw.
Have you seen My Morning Jacket yet?
Boomer, I share your concern about the VIX.
However, check out this research:
http://quantifiableedges.blogspot.com/2008/06/does-lackadaisical-putcall-keep-market.html
As for sustained bounces, I really do not need any right now to bank coin. Just give me several 2-4 day rallies. But I agree, there may not be anything sustainable for more than 3-5 days until we get some capitulation.
That being said, I’m up over 100% on some of my puts. I’m starting to get greedy to harvest those profits. I’m sure others are too. When shorts start protecting profits (which should be healthy by now), you know what happens next. Again, it only needs to last a few days to be traded profitably. Other than that, one must honor stops, and always know how much of his equity is at risk.
For some reason, almost everyone I talk to has just accepted that the market is in the shitter. I talked to this guy today. He said, “My 401K and IRA has been destroyed. I can’t retire now, but I’m going to anyway.” There is still so little fear out there, it is unbelievable. The attitude is so less fearful than Jan-Feb.
As for selling and holding, my initial reaction to that thought was that bear markets are not just bull markets in reverse. I think it will be very very tought to sell and hold. The psychology necessary to survive such a methodology may have to be developed carefully, over time. I’d rather diversify based on time, meaning, some short term directional trades to capture short swings, and some longer term directional trades to try and capture bigger movements, and lots of cash, just in case.
jake – im a retard. its taken me some time to adjust. im slow like that. yes, bham is a great town.
thanks shed, very sensible advice
I’m thinking about shorting EBIX and IDCC