Dow Outlook 090824 - More Upside to Go?

Dear Friends,

I rarely write Technical Analysis Outlooks nowadays as I am concentrating on improving my trading skills. However, since I have written this Dow Outlook 090824 for a friend, I have decided to share it on my blog.

Let's look at the facts first. The Weekly Dow Chart shows that we are now in the process of either Wave 3 or Wave C. There was a Downward Correction in the Current Uptrend during mid June to early July 2009, which served as Wave 2 or Wave B.


What is the difference between Wave 3 and Wave C? At this stage, although we believe that the current upturn is a Bear Market Rally, we do not know for sure whether this will be a 5 Wave Bear Market Rally or a 3 Wave Bear Market Rally.

If it is a 3 Wave Bear Market Rally, then it is a Wave C, which should end very soon, and resume its Primary Downtrend. On the other hand, if it is a 5 Wave Bear Market Rally, then it is a Wave 3, which, after another downward correction, will resume its upward movement.

My best guess is that it is a 5 Wave Bear Market Rally, since this is THE Big Wave. Why? This is based on my observation of Monthly Chart.


From my studies of 80 years of Dow movements, the current price behavior suggests that the most likely scenario is an eventual movement up to the SMA50 Region, i.e. the Blue Line.

The Dow is not likely to breach this Monthly SMA50 level, which currently stands at 11,217. You will note that the SMA50 is dipping downwards, and thus, by the time the Dow approaches this line, the new SMA50 level should be around 11,000.

Given that quite a number of Technical Traders know about this phenomenon, I expect some to act BEFORE it really arrives at the line itself, and thus, my Medium Term Outlook is that the Dow will reach a Forecasted Peak of somewhere between 10,500 to 11,000, which will serve as the end of this Bear Market Rally.

Please note that when we deal with Probabilities, there is no certainty that the Forecast will happen. There is only a higher probability that it will happen. Thus, we can still be wrong, although when the probabilities are in our favor, we have a higher chance of being right than wrong. That is all we can ask for, with Technical Analysis.

Whilst my Medium Term Outlook of 3 Weeks to 3 Months is bullish, my Long Term Outlook of 3 Months to a year remains extremely bearish, and I would reiterate that I expect the Dow to break below 6,000 in time to come. This is because the current Bear Market Rally is Market Sentiment driven based on the Market Untruth that an economic recovery is under way, whilst the truth is that there is much more pain to come in the next one year.

What is really interesting today, is the Daily Chart.


I had expected the Downward Correction which started in mid June 2009 till early July 2009, to last longer, and that the Dow was not likely to breach the June High by much.

However, I was wrong, and the Dow has since moved far away from the June 2009 Market High. In light of the new information, it would seem that Wave 3 or Wave C is very much under way. If this is the case, then, there should not be any downturn to below the Wave 1 / Wave A June High any time soon. This is because both Wave 3 and Wave C are 5 wave movements, and Wave 3 is usually the longest wave, as is usually Wave C.

If the Elliott Wave Theory explained above holds true, then, this current upward movement must run for a longer duration and further than the earlier Wave 1 / Wave A.

Since the first wave moved from 6,500 to 9,000, i.e. 2,500 points, we can expect the current wave to move up by at least a similar amount, i.e. from 8,100 to at least 10,600, before ending. Of course, the Dow will not go up in a straight line, but will bob up and down in between.

As for the duration of the current movement, we cannot expect it to take as long a time as was done in the first wave. The first wave took around 3 to 3.5 months, before experiencing a 1 to 1.5 months correction.

Here, the current wave movement could be over sometime between 2 to 3 months, i.e. sometime between September and October 2009, possibly depending on how fast it gets to the targeted 10,500 to 11,000 region.

As usual, I wish you success and many profitable trades.

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. :)

Best wishes,

Ooi

© Copyright 2009 of Praesciens.Blogspot.Com.

US Dollar to Weaken?

Dear Friends,

This news article from Bloomberg today, entitled "Pimco Says Dollar to Weaken as Reserve Status Erodes is one of the most significant information on the US Dollar, that I have seen for quite some time.

Why? Because PIMCO is the largest Bond Fund investor in the US, and Bill Gross is the Bond King of the world. So, when PIMCO or Bill Gross makes a statement, I listen.

The message bears an extremely high significance in my mind because it is very rare that PIMCO or Bill Gross comes out speaking negatively against the US Economy, its Government, or its Currency. PIMCO and Bill Gross tend to be politically correct, and is more diplomatic than most other fund managers in their public views. So, when they say something so negative, it is actually quite alarming.

Nevertheless, don't panic, and rush to sell all your US Dollars straight away. This is a Long Term Structural Issue for the US Economy, and I agree with their opinion. BUT, there is time to do the necessary, i.e. to hedge against such a High Impact Uncertainty.

Currently, the US and the World Economy is still in Asset Deflation Mode, with the exception of the stock market, which is in a Strong Bear Market Rally, albeit a potential downward correction in the short term.

Property Prices will continue to fall, and Consumer Demand will remain lethargic at best, and is more likely to drop further, with time. Thus, Commodities Prices in general, will fall lower, in the longer term, albeit swings to the upside, due to Bear Market Rallies.

What is becoming clearer, and will become even clearer, is that Consumer Price Deflation will also be experienced, at least in the Short to Medium Term. Until and unless the US Dollar weakens significantly, the US and World Economies are slipping deeper into the Great Recession, and possibly into an Economic Depression.

I am not talking about the Technical Statistical Positive Growth of 0.3% achieved after the economy has fallen off the cliff which economists call an "Economic Recovery".

It is really amazing how it takes two quarters of negative GDP growth to officially confirm a Recession, but a mere 0.3% positive growth in a single quarter to announce an Economic Recovery.

The real truth is that the Pains of the people will continue, irrespective of what the statistics say. Business conditions will remain lethargic at best, and Consumers remain cash strapped, and heavy losses will persist in the housing market.

Job Losses are slowing down in momentum, which is good news, but ..... job losses persist, even if less people are losing their jobs compared to a few months ago. A reduction in the momentum of job losses does not equate to a turnaround in the economy. It does have the potential, but it is way too early to make such audacious claims.

Worst, when analyzed as a total economic system, the signs are still very unhealthy.

In conclusion, I stand by my view that for the Short to Medium Term, the Economic Outlook is one of Asset Deflation and Great Recession bordering on Economic Depression.

However, I do agree that there will come a time when the US Dollar will face some form of Currency Devaluation Crisis, due to excessive printing of money, and when this happens, then the Stagflation Scenario will materialize.

The challenge is in getting the timing right. To hedge against Stagflation, we need to invest in Precious Metals like Gold and Silver, and even buy some stocks that are commodities / mineral resources based.

However, in an Asset Deflation Environment, like the current Great Recession, which can easily plunge into an Economic Depression, holding any Assets, be they Precious Metals or Stocks or Properties, will result in Losses from Dimunition in Asset Value.

This is why we have to be extremely careful in ascertaining the right market timing.

Frankly, I need to warn that it is indeed audacious to suggest that we can time our Portfolio Management Strategy so well. Economic Statistics tend to be conflicting, and if anything, tend to confuse us more than illuminate our understanding.

However, the KEY to the Golden Doors between the two Conflicting Investment Scenarios, i.e. Asset Deflation vs Stagflation is the World Interest Rates. Before a US Dollar Devaluation Crisis, which usually precedes a Stagflation Scenario, the Major Governments of the World will do its best to avert such a crisis.

The Key Tool available to fight a Currency Devaluation Crisis is the Central Bank Interest Rate. By raising Interest Rate, a Central Bank hopes to attract investors into buying its currency, and thus, stem the tide that would otherwise have been disastrous.

I would highlight that by the time a Currency Crisis is about to happen, such an effort is unlikely to work. Nevertheless, I have not seen a Government that will not try, using this policy, to fight off the crisis.

Thus, I stand by my earlier analysis that World Interest Rates have to rise first, before a US Dollar Devaluation Crisis leading to Stagflation will materialize. Nevertheless, it is important to note that by the time World Interest Rates rises, the US Dollar could have, and in all likeliness, would already have devalued to some extent.

BUT, there is a major difference between the normal fluctuations of a currency, strengthening at certain times, weakening at other times, as opposed to the whole world deciding with a single minded view, that the currency is in deep trouble. Right now, the world views are still quite divided.

If and when the World Views are starting to converge in one direction, the US Dollar Devaluation will start to gather momentum, and the Federal Reserve will provide us with the first sign of trouble, i.e. a raise in Interest Rate. Whether the raising of the Interest Rate is explained as due to an improvement in economic conditions is immaterial.

What is significant is that Interest Rates are being raised, for fear of Stagflation, which is just another way of saying the Federal Reserve is starting to show concerns for a Currency Devaluation.

If there is no concern for Currency Devaluation, most Governments will persist with a Low Interest Regime, because it lowers the Government Budget Deficits Funding Cost, and thus, the Government has more money to spend.

In conclusion, my opinion is to persist in holding cash, but be nimble enough to protect ourselves, at the first sign of trouble, i.e. when US Interest Rate starts to rise, or is likely to rise.

Best wishes,

Ooi

Economic Recovery with Pain

Dear Friends,

This Wall Street Journal video suggests that the US Economic Recovery will happen, but the Pain will remain, making it feel like there is no recovery at all.

David Wessel, Economics Editor of the Wall Street Journal explains why. I think that this is a very balanced and objective summary of the US Economic Situation.

Best wishes,

Ooi

California Hotels Are in Financial Trouble

Dear Friends,

This Wall Street Journal Video reports that even luxury hotels are in trouble. 32 hotels have been foreclosed in California, with another 218 in distress. Even the famous St. Regis in California has closed down.

With a number of loans coming due for repayment, occupancy rates having fallen from 80% to 40%, and hotel property valuations down by as much as 40%, there seems to be little hope of a good solution to their financial problems, and ultimately, the banking losses problems.

Best wishes,

Ooi