Saturday, May 22, 2010

Complete market analysis from 6 months to 30 years

To help others see how trends are formed, I will use the same analysis method that I used yesterday on the Dow Intraday Charts. I used these charts to predict the trend to follow. Let's look back at various timeframes, from as little as 6 months, to as long as 30 years. This context should help others understand why I have been sounding the alarm to be cautious now, as we are about to witness a crisis of confidence unparalleled in our generation. But let's not get too much ahead of ourselves. I will start with a 6 month chart of the Dow as the Index for comparison. First the chart, then the discussion will follow each chart. Look for the "W" patterns underlined in Red and notice the slant of the red line and what trend followed immediately after the last leg of the "W" pattern.

As you can see above for each "W" pattern, a Red Line under the 2 bottom points identifies the "W". It shows the direction of the trend to follow. In this case for the 6 month chart, the last "W" pattern formed shows we are indeed going to go down much lower after the next leg goes up. This is based on the steepness of the last pattern. So now at least short term, we know we are going down lower after the next leg goes up. I will show you in a different chart that the next leg up should go to about Dow 10.500 to 10,600 max.

Above is a 1 year chart of the Dow, where I have drawn several red lines at the "W" patterns, showing the slant and following trend. You will notice that there was a slant down of the pattern in the February timeframe, followed by a small drop after that. Then the pattern reversed, and the Dow continued its uptrend until the beginning of May.

This 5 year chart of the Dow above, shows that the Dow had 2 "W" patterns pointing down, and that it was headed lower, which resulted in the lows of March 2009. However, after that, a reversal drove the market back up to the highs in April 2010. Not much you didn't know here, but it is revealing to see that the charts showed where we were headed in advance .

And last, but more importantly than all the rest of the charts, this Dow 30 year chart shows where we are headed, and it is lower! The second leg of the "W" pattern was at 6,440, if you remember those lows. It was a very scary time. This chart indicates we are headed lower than that. And if you have been reading my earlier posts, you know many indicators have been sounding alarm bells for a while. I refer specifically to the 30 year chart posted on May 7th (based upon Elliott Wave Theory and Fibonacci numbers), and to the previous warnings on April 10th and April 14th (using Put to Call ratio data and VIX (Volatility) Index data.) It was only in April that the crescendo got so loud that it would be foolish to ignore it .

I hope I have given you a sound basis for believing what is about to happen. The last thing in the world I want to say is "I told you so!" So please evaluate this and plan for the future. Most of you reading this work very hard to make money; you need to work just as hard to keep what those long hours have produced. One last word: The market is set to recover a bit in the following days and maybe weeks, as we go back up to 10,600 or so. This is about where the drop down should begin.

So you have more time to regain some of the losses these past few weeks, and to prepare yourself for surviving the crash. Cash is a real good place to keep your sales of stocks until things get better. I do not believe Gold is going to be the currency of choice. People aren't going to bring their Gold to the grocery store to buy milk and bread. Nor will they use Silver to do that.

Currency will still be around and even more precious, as many will have lost plenty of it, and will be selling whatever they can to raise cash. That is why prices will drop in everything, as they did in the last big housing drop. Cash will be King, as they said during the Great Depression. Those who had it survived. This world market drop will cause businesses to cut more costs, and that means people. So the unemployment rate will surely rise again. Here is one last chart to show the Global nature of this impending crash. I have a chart below of the Nikkei 225 Index. It shows their index is also heading below 7,000. The Nikkei closed on Friday below 10,000 to 9,774, down 246 points, and it hit an intraday low of 9696.

Good luck to all who read this. I love to hear from you, so if you have a comment, please leave it. Let me know if this is useful, interesting and/or educational. Oh, and don't forget to take my Mini Poll survey on the right side of this page. Thanks in advance!

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Anonymous Anonymous said...

I have a few DRIP stocks which I have had for quite some time. One is PEP, which I acquired over 20+ years ago while working there. I received shares in addition to a paycheck so my cost basis is unknown. At this time I am very confused as to whether I should sell and wait or continue to hold. PEP now is around $63.58 share. Thank you for advice.

11:32 AM  
Blogger Charles Amico said...

Dear Anonymous, I am not a Financial advisor so I can't advise you what to do. I would definitely talk to your Financial Advisor and ask her/him. But you will need to guide her so she can help you. Here are some questions in advance to consider:

• If PEP drops like the rest of the market and say goes as low as $45, how will you feel and manage?
• Same question, how about $20?
• How much of my net assets are tied up with PEP? Is this a significant portion of my assets? Am I really diversified in my portfolio or concentrated in one or just a few stocks?
• Am I losing sleep over the level of risk I have assumed?
• Am I retired with no more income?

These questions can help when you talk to your financial advisor, as it will help her/him better understand you and your individual needs. If you look at the stock chart, it has closely mirrored the overall market no matter what timeframe I look at.

Sorry I can't add any thing else. Good luck.

12:47 PM  

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