Mar
06
2009

  Dow 3900?

I'm glad to see the DOW finally sliding into the mid-6000s, since I've been waiting for this level for quite some time. It has been inevitable, according to my charts. But now things could get interesting.

I just updated my graph comparing the percentage drops in the DOW from the 1974 recession compared to our current state. The two charts were tracking together well from July 2006 through September 2008, but then they diverged sharply, with the current chart dropping steeply through October 2008. The chart from the 70s experiences a similar steep decline, but based on the historical pattern, it would occur next month (April 2009), so this time it was about seven months earlier than expected. But the percentage decline was about the same.

In the 70s, it took about one month from the steep drop to hit bottom, then about two more months for the bottom to be re-tested. From there, the stock market went up for about five months before stagnating for about six months before another push upwards.

In recent weeks, the stock market's decline has far surpassed the 70s-era decline in terms of percentage-loss from previous highs. But it's still on-track as far as duration is concerned. As far as I can tell, I'm still looking for a recovery to start sometime this summer, although there should be a very short and steep rally in the interim, which I will hopefully buy into to book a short-term profit.

But since the charts did diverge quite a bit already, perhaps the timing will also diverge-- then who knows when a market recovery will begin. The thing about technical trading is that it's not necessarily predictive, you have to wait until a trend begins, is confirmed, and THEN you trade. So it's not exactly buying low and selling high-- it's buying on the way up and selling on the way down. You don't make the absolute maximum theoretical profit, but you should make a profit on the balance.

So I can't just set an automatic buy for mid-July, since although it appears that's when the market will bottom out, I won't know for sure until the market actually bottoms out and starts heading up again. This is why it's difficult to make money trading-- you really have to keep up with it, and treat it like a job. If I just went by my current analysis, I'd just goof off until July, then start paying attention again. But then I might miss the rally!

Also, based on some pattern-extrapolation from the 1970s chart, I'd expect the market not only to bottom out around mid-July 2009, but for the level to be around $6000 or so, which is not all that far off from current levels. It would make sense, both from an intuitive standpoint and timing-wise.

BUT, if that divergence last September & October invalidates the whole 1970s comparison, and I just look at the historical price chart of the DOW, I come up with a very different number. There was a level of "support" back around $5400, which is a number I've heard bandied about various trading forums. But the market wasn't at that level for very long, and the next level of support down from that, which lasted for over a year, was around $3900. I have NOT heard many traders talking about the DOW getting down to that level, but it does seem to me like it's the worst-case scenario at this point. Although $5400 does seem likelier.

Uuntil the current parallel with the 1970s-era timeline is broken, I think I'm leaning towards a bottom closer to $6000. Only if the market hasn't hit 6000 and re-tested itself by the end of the summer would I think the $5400 number is more likely.

After reviewing the comparison charts, I guess I'm less hostile to the voices shouting "invest now", since for the long-term investor, the odds are favoring that by investing now you will only lose another 10% or so of value, before things start to pick up. And on a 10-year timeframe, that's probably not so bad. But it's still risky. Personally, I'm going to wait until that 10% loss has already occurred, and THEN start to buy in. But I have the time to monitor the situation, so I won't be waiting too long to buy in. If you only check your investment statements quarterly, and make decisions a few times per year or less, then maybe you'd rather take the risk now. I don't know. I don't even think like that anymore.

I just hope that there is some tradeable movement before I go into labor, so I can get in on the action that is bound to happen when the market hits the big bounce rebound (which will almost immediately fall back to bottom, it will take skill to play it well). From what I've been told, I will not feel like tracking the market so much when there is a little baby around to be falling in love with.

Just thinking about that does make me get all mushy, and take my mind off the tape. But we'll see. I don't know how long it will last. Even if it's just a few weeks, it will be long enough I might miss the rally. But in the long run, who cares? Better to prioritize the first weeks with my son or daughter, there will be other market rallies (albeit this one might be the humdinger of a lifetime) but never another infancy with this particular child (or any other child-- I'm no spring chicken myself, it is something of a miracle that I'm even having this one!).