Dow Outlook 081019 - Period of Healing

Dear Friends,

The Dow crashed to a low of 7882 on 10th October, but rebounded to a high of 9794 on 14th October. It closed at 8852 on Friday, 17th October 2008.

You will note that from the Rebound High point of 9794, there is a Resistance Level that is sloping downwards to the 8800 Level.

You will also note that from the Crash Low point of 7882, there is a Support Level that is climbing upwards and converging somewhere in the 8800 level as well.

Thus, the Resistance Downward slope and the Support Upward Climb is forming a Sideways Consolidation Price Pattern called a Symmetric Triangle, with an Apex somewhere around 8850.

The Symmetric Triangle tells the story of Short Term Indecision in the market in the next one to two weeks, as it waits for fresh leads.

The good news is that Volatility is decreasing, and thus, barring any unforeseen circumstances of further bad news, we should expect the Dow to experience a calmer, progressively narrowing trading range which was our initial Outlook on 13th October 2008.

However, our Outlook on 16th October warned of the possibility of a 2nd Crash Scenario, especially in light of the continued high volatility, and in comparison to what happened in the Great Crash of 1929. We mentioned then that the Dow needs to calm down and reduce its volatility level, if the risk of a 2nd Crash is reduced.

The next day, the 16th October, the Dow opened at almost the same level, but dropped to a low of 8197, and the Bulls had some very scary moments. However, it rebounded to close almost at its high, at 8979.

On Friday, 17th October, again, the Bulls got over adventurous, and after the Dow had risen to an intra-day high of 9281, the “hopeful” bullish sentiment fizzled out once more. This time, the Dow fell to an intra-day low of 8718.

However, the Bears cannot claim victory over the Bulls for Friday’s battle as the Dow closed near somewhere near the middle, at 8852.

This reflects a stalemate position between the Bulls and the Bears, and a sentiment of weakening hope amongst the Bulls for a sustained rally, amidst increasing caution amongst the Bears. This growing indecision should lead to a calmer, progressively narrowing trading range, and thus, the market sentiment supports the Price Pattern that is in the process of forming ,barring the announcement of further bad news that can once more instigate further fear and volatility.

In this respect, we would state that the risk of a 2nd Crash is now reduced compared to 16th October. Nevertheless, given that there is no such thing as a Sure Thing” in the market, we have to consider what if we are wrong in our Triangle Scenario, and for some reason, Volatility forces a breakthrough of the Triangle into some other trend.

For those Bulls having Long Positions, the fall of the Dow below Triangle Support Level, currently set at 8197 would indicate a higher probability of the market going even much lower. Bulls should consider preserving their capital by putting a stop loss order against their Long Positions just below this level, taking into account the possibility of a False Breach.

On the other hand, for Bears with Short Positions, the rise of the Dow above the Triangle Resistance Level, currently set at Friday’s Intra-Day high of 9309, would indicate a higher probability of the market going much higher. To preserve capital, Bears should consider putting a stop loss order at just above this 9309 level, taking into account the potential of a False Breakout.

When I say, “taking into account the potential of a False Breakout or Breakdown, I mean that we shouldn’t put our order too close to the stated level, but give it enough room to breathe in case of a breach. How far away will depend on the volatility currently being experienced as well as the assessment of the strengths of the Support and Resistance Levels in the vicinity. Each trader will have his own favourite Stop Loss System, and you will have to decide on your favorite system.

What about trading the Triangle Price Pattern Breakthrough?

It is possible, but my opinion is that there has not been enough days of consolidation as yet, and thus, it is likely that breakthroughs at this stage will be false. Having said that, I would like to mention that I was too conservative in worrying about the False Breakdown of the Support Level of Gold at US$830 per ounce, and thus, in trying to save a few dollars of whipsaw moves, I missed out on thousands of dollars of profit when Gold did breakdown below this level and closed US$787.70 on Friday, 17th October 2008. The opportunity loss has been most substantial, all the more so, for the correct Global Macro Outlook. I am still kicking myself over this sore point.

In conclusion, our Short Term Outlook of the next one to two weeks is one of a “Period of Healing” with calmer, progressively narrowing trading range.

We maintain our Medium Term Outlook of 3 weeks to 3 months that the Dow should move in tandem with the Law of Mean Reversion, back towards the SMA50 Level, which currently stands 10814. This is because the Dow has moved too much, too soon, ahead of the present market outlook of the US Economic Situation.

Lastly, the Long Term Outlook of 3 months to a year, remains negative, and this is reflected in a downward sloping SMA200, which is the Green Line in the Daily Chart.

Best wishes,

Ooi

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