There are generally two kinds of Technical Analysts; those that are firm believers in Elliot Wave Theory (EWT) and those that aren't. I am one of those that believe that we should not become fanatical about any analysis tool, but neither should we ignore one that shed some light on the mysterious happenings of the financial markets.
Thus, I am going to start off this Technical Outlook of the the Dow (Dow Jones Industrial Average) with an important EWT Observation.
As can be seen from the Weekly Chart, the Dow has completed its 5 Wave Downturn. Wave 1 started with the fall from the historical peak of 14198.1 to the Intermediate Pivot Low (IPL) of 11634.8, yielding a loss of 2563.3 points for a Correction of 18.1 %
Chart Courtesy of StockCharts.Com
Wave 2 was a Bear Market Rally, that took the Dow higher from the IPL of 11634.8 to a Intermediate Pivot High (IPH) of 13136.7, for a Retracement Value of 1501.9 points or a 58.6% Retracement from its Wave 1 Downswing.
Wave 3 was a disastrous downturn for the Stock Market Bulls, falling from the IPH of 13136.7 to an IPL of 7449.4, yielding a downswing value of 5687.3 points. Wave 3 is never the Shortest Wave, and is usually the Longest Wave, especially for the Stock Market, and this seems to be the case, for the Dow.
Wave 4 moved from 7449.4 to a IPH of 9008.1 before succumbing to a Wave 5 of what seems to be a Primary (Long Term) Downtrend. This gave an Upswing Value of 1558.7 or a Retracement Percentage of only 27.4%.
The Final 5th Wave was constructed with the fall from IPH of 9008.1 to the Low of 6470, for a fall in value of 2538.1 points.
It is interesting to note that the Downswing Value of Wave 1 of 2563.3 points is very close to the Wave 5 Downswing Value of 2538.1. Wave 3 is the longest wave with the Downswing Value of 5687.3 points. Thus, the Dow had lost 7728.1 points or 54.4% of its value from the Historical Peak of 14198.1 when it reached the Market Low of 6470.
For the Non Believers of EWT, the performance of the Dow thus far, seem to suggest that one should not dismiss EWT so easily.
The analysis above is well and fine, but how do we use EWT to make money? If we believe in EWT, then the Basic Wave Cycle consists of a 5 Wave Trend Structure (1-2-3-4-5), and a 3 Wave Corrective Structure (A-B-C). Thus, we can expect a significant Bear Market Rally after the Market Low of 6470.
The analysis above is well and fine, but how do we use EWT to make money? If we believe in EWT, then the Basic Wave Cycle consists of a 5 Wave Trend Structure (1-2-3-4-5), and a 3 Wave Corrective Structure (A-B-C). Thus, we can expect a significant Bear Market Rally after the Market Low of 6470.
My work with Fibonacci Theory Modelling and analysis of Key Support and Resistance Zones suggest that this Bear Market Rally has the potential to reach as high as 10900 +/- 300 points, before resuming its Primary Downtrend movement.
However, the fulfilment of this potential very much depends on how price behaves at the level of 8900 +/- 300, which is a Key Support & Resistance Zone.
This anticipated Corrective Structure is significant because it is expected to retrace a minimum of 2430 points from the Market Low of 6470 to 8900, whilst the potential exists to rise as much as 4430 points to 10900. Thus, it may not be wise to hold any Short Positions at this stage. In fact, can we do without a Long Position in this coming upturn?
It should be noted that the Weekly MACD and Stochastics have turned bullish, and thus, support this idea of a Significant Upturn.
However, the fulfilment of this potential very much depends on how price behaves at the level of 8900 +/- 300, which is a Key Support & Resistance Zone.
This anticipated Corrective Structure is significant because it is expected to retrace a minimum of 2430 points from the Market Low of 6470 to 8900, whilst the potential exists to rise as much as 4430 points to 10900. Thus, it may not be wise to hold any Short Positions at this stage. In fact, can we do without a Long Position in this coming upturn?
It should be noted that the Weekly MACD and Stochastics have turned bullish, and thus, support this idea of a Significant Upturn.
Nevertheless, a review of the Daily Chart for the Dow reveals that the Daily Stochastics has been at Gross Overbought Level for some time. This suggests a High Probability of a Lower Degree Short Term Downward Correction Wave within an Upward Higher Degree Medium Term Correction Wave Bear Market Rally).
Chart Courtesy of StockCharts.Com
Chart Courtesy of StockCharts.Com
This Lower Degree Downward Correction Wave is forecasted to bring the Dow down to the level of 7100 +/- 150 points before resuming its Medium Term Upward Trend.
This leaves one last point which is very much in contention even between respected fund managers, i.e. the million dollar question, "Is this a Medium Term Bear Market Rally within a Long Term Primary Downtrend, or have we seen the worst, and formed a Primary Trend Market Bottom, and thus, this is the continuation of the 20 year Primary Uptrend?
The truth is, only time will tell who is right and who is wrong. However, in my judgment, we have not seen the worst of this US and World Economic Recession. Obviously, with President Obama throwing huge chunks of money at the economic and financial system problems, i.e. US$3.8 trillion to be exact, we are likely to witness GDP Growth, at least statistically speaking.
Why? Because of the simple formula, GDP = C + I + G, where C = Consumption, I = Investments and G = Government Spending.
If Government Spending is large enough, it will offset the decrease in Consumption and Investments that is currently being experienced, and thus, yield a statistical result of GDP Growth.
Whilst statistically, the US Economy will experience GDP Growth, it will feel like the economic pain is very much the same, for the average layman on the street. Why? Because this GDP Growth is not broad based, and more importantly, this economic growth is a Jobless Growth, i.e. we could see Unemployment not only persisting, but actually rising, despite the statistical GDP Growth.
Investments will not be made as long as Consumers don't spend. Without Investments, there will be no Job Creation. However, how can Consumers spend, when they are uncertain about their Employment Future? This is a Vicious Cycle of an Economic Recession.
In the past, more specifically, in the Great Depression Era, John Maynard Keynes came up with this idea of Government doing the spending, so as to jump start the economy. With Government Spending, businesses will start to invest, and this in turn will create jobs. With Job Creation, and given enough time, Consumers will increase spending, as they will have a bit more money, and more confidence, with better job security.
However, there is one major difference between the US Economy during the Great Depression of the 1930s and today. The US Economy is now one of Services, whilst in the Great Depression, the United States was the Industrial Might of the World.
Today, if the US Government spends, it does not necessarily mean that US Businesses will benefit, because the materials is likely to be manufactured outside of US. Even labor might be imported from Mexico.
In view of the fact that the US Economy is largely Services based, the effect of Keynesian Theory, i.e. Government Spending in the form of Economic Stimulus, may not have the necessary traction to deliver desired results.
Today, Government Spending is the most expensive way to achieve economic growth, and if spending is not wisely done, will be a waste of taxpayers' money, i.e. without real job creation,. Even worse, when the time comes, somebody, i.e. the US Citizens will have to pay for the increased Government Debt due to the Budget Deficit.
It is important to note that a Budget Deficit means that the US Government will have to increase Government Debt by the amount of the Deficit because it will have spent that amount in excess of what it earns in taxes and other income from Americans and American Corporations.
Thus, the most important question is not whether the US Economy will experience GDP Growth some time in 2010. The US Government has already "bought" the necessary statistics with a Government Budgeted Spending of US$3.8 trillion, which will result in a Budget Deficit of US$1.8 trillion. We can expect the US Economic Statistics to yield the necessary growth figures for the year 2010, despite the lack of Traction (Results) today.
The most important question is, "What happens AFTER the huge Government Spending and trillion dollar deficit?" Will the US Government continue its path of excessive printing of money, or will it stop? If the US Government reigns in the spending and the Budget Deficit after 2010, then, the US Economy will only have experienced an Upward Statistical Blip, and then, go back into another Economic Recession, or possibly, a Depression, now that the US Government is powerless to spend more.
This is why I believe that the Primary Downtrend Wave will not only continue, but will take the Dow even lower, to the 4000 level, after this Significant Bear Market Rally. However, in the meantime, as the saying goes, "Strike while the iron is hot", and thus, we should "make hay while the sun shines", and enjoy the impending upturn.
In view of the above, my Outlook for the Dow is as follows: -
Please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)This leaves one last point which is very much in contention even between respected fund managers, i.e. the million dollar question, "Is this a Medium Term Bear Market Rally within a Long Term Primary Downtrend, or have we seen the worst, and formed a Primary Trend Market Bottom, and thus, this is the continuation of the 20 year Primary Uptrend?
The truth is, only time will tell who is right and who is wrong. However, in my judgment, we have not seen the worst of this US and World Economic Recession. Obviously, with President Obama throwing huge chunks of money at the economic and financial system problems, i.e. US$3.8 trillion to be exact, we are likely to witness GDP Growth, at least statistically speaking.
Why? Because of the simple formula, GDP = C + I + G, where C = Consumption, I = Investments and G = Government Spending.
If Government Spending is large enough, it will offset the decrease in Consumption and Investments that is currently being experienced, and thus, yield a statistical result of GDP Growth.
Whilst statistically, the US Economy will experience GDP Growth, it will feel like the economic pain is very much the same, for the average layman on the street. Why? Because this GDP Growth is not broad based, and more importantly, this economic growth is a Jobless Growth, i.e. we could see Unemployment not only persisting, but actually rising, despite the statistical GDP Growth.
Investments will not be made as long as Consumers don't spend. Without Investments, there will be no Job Creation. However, how can Consumers spend, when they are uncertain about their Employment Future? This is a Vicious Cycle of an Economic Recession.
In the past, more specifically, in the Great Depression Era, John Maynard Keynes came up with this idea of Government doing the spending, so as to jump start the economy. With Government Spending, businesses will start to invest, and this in turn will create jobs. With Job Creation, and given enough time, Consumers will increase spending, as they will have a bit more money, and more confidence, with better job security.
However, there is one major difference between the US Economy during the Great Depression of the 1930s and today. The US Economy is now one of Services, whilst in the Great Depression, the United States was the Industrial Might of the World.
Today, if the US Government spends, it does not necessarily mean that US Businesses will benefit, because the materials is likely to be manufactured outside of US. Even labor might be imported from Mexico.
In view of the fact that the US Economy is largely Services based, the effect of Keynesian Theory, i.e. Government Spending in the form of Economic Stimulus, may not have the necessary traction to deliver desired results.
Today, Government Spending is the most expensive way to achieve economic growth, and if spending is not wisely done, will be a waste of taxpayers' money, i.e. without real job creation,. Even worse, when the time comes, somebody, i.e. the US Citizens will have to pay for the increased Government Debt due to the Budget Deficit.
It is important to note that a Budget Deficit means that the US Government will have to increase Government Debt by the amount of the Deficit because it will have spent that amount in excess of what it earns in taxes and other income from Americans and American Corporations.
Thus, the most important question is not whether the US Economy will experience GDP Growth some time in 2010. The US Government has already "bought" the necessary statistics with a Government Budgeted Spending of US$3.8 trillion, which will result in a Budget Deficit of US$1.8 trillion. We can expect the US Economic Statistics to yield the necessary growth figures for the year 2010, despite the lack of Traction (Results) today.
The most important question is, "What happens AFTER the huge Government Spending and trillion dollar deficit?" Will the US Government continue its path of excessive printing of money, or will it stop? If the US Government reigns in the spending and the Budget Deficit after 2010, then, the US Economy will only have experienced an Upward Statistical Blip, and then, go back into another Economic Recession, or possibly, a Depression, now that the US Government is powerless to spend more.
This is why I believe that the Primary Downtrend Wave will not only continue, but will take the Dow even lower, to the 4000 level, after this Significant Bear Market Rally. However, in the meantime, as the saying goes, "Strike while the iron is hot", and thus, we should "make hay while the sun shines", and enjoy the impending upturn.
In view of the above, my Outlook for the Dow is as follows: -
- Short Term Outlook (3 Days to 3 Weeks) = Bearish with a Downward Correction to 7100 +/- 150.
- Medium Term Outlook (3 Weeks to 3 Months) = Bullish with an Initial Target High of 8900 +/- 300 and a potential Maximum High of 10900 +/- 300 points.
- Long Term Outlook (3 Months to a Year) = Bearish with a Market Bottom at 4000.
Best wishes,
Ooi
© Copyright 2009 of Praesciens.Blogspot.Com.
Posts
No comments:
Post a Comment