Saturday, June 05, 2010

Overall Stock Market outlook, analysis and commentary.

I have 4 charts to present to you today. The first is the closing Intraday Dow chart of yesterday's market action and the second is a 30 year chart of the Dow. The 3rd is a 30 year chart of the Nasdaq. These time extremes are fascinating to compare, as they truly do show the similarity of chart patterns and can be predictive of the future direction of the market. The last chart is of our National Debt and I will save that for the end.

So starting with yesterday's chart above, you can clearly see we did not close at the lows of the day, but not by much. In fact, one half hour before the closing bell yesterday, I said it would be important for those of us on the Short size of this market, to see the Dow close between 35 and 50 points above the close. If it closed at the lows I said, we would have created a Hammer candlestick pattern and the market would reverse next week and rise again. But the market closed up 42.09 points above the low for the day which was 9,889.88, closing at 9,931.97 which is between 35 and 50 points.

The "W" patterns I have drawn with Red lines in previous posts these past few weeks should have given you confidence that you can draw these as well as I can and that they are truly predictors of future direction in the short term. The same is true when looking at charts over very long time frames. Turn your attention above, to the 30 year Dow chart now and look at the developing large "W" pattern which is in the process of finishing its last leg. The "W" is clearly slanted down and you know what that means, we are headed lower than the lowest leg of the "W". So yesterday's action, coupled with the drop the past month or so, do point to a turn of significant importance.

Many don't believe in reading charts. They think it is a waste of time. They say they like the Fundamentals. But what they don't factor in is Investor Mood. Investor mood has been sour for the past 10 years since the bust. That's at least true of my generation. We have been investing in the stock market since the 60's and 70's and got a real shake when the bubble burst. It affected us like the Great Depression affected our folks but not to the same extent. Well, we may still have the same affect as this market continues to go down over the next several years. This is why I have been warning many readers and friends now for almost a year. During the year 2000, I remember warning many in a Newsletter I was writing weekly. Friends said I was crazy to get out of the market when the Nasdaq was at 4,200 range climbing that steep wall towards 5,000 when I sounded the alarm to go to 100% cash. They said "Good money was still to be made and I should get some of it. I was busy selling into repeated rallies until I was 100% cash and then only buying Put Options and waiting. Then it came and many were wiped out of their life savings. Very sad, as greed had won over fear until the crash.

As you can see from the 30 year chart of the Nasdaq above, we have never recovered from it. You can see that there is a "W" pattern, which I have underlined in Red. You can also see that this "W" pattern is almost flat. When the "W" pattern is flat it means that we will eventually stay flat and go back to that flat line which will be the new support level. That indicates that when the Dow does drop and retest the lows and goes below them, the Nasdaq should return to about 1,100-1,200 and not go below that level. We closed at 2,219 yesterday; that's a 50% decline from here. The Nasdaq did go as low as 1,300 or so in 2008 and that is its low to retrace to. So it is not impossible to wipe out all the recent gains of the past year on the Nasdaq as easily as the Dow.

So what to do? Again, as I have said before, there is nothing wrong with taking profits off the table. I did this week on my TZA Put Options on Thursday, perfectly timing the gains before the big drop. You can do the same. This is not Rocket science. It is not as difficult as plugging the hole in the floor of the Gulf. If you have the time, you can learn how to do this and save and protect your assets. Even Jim Cramer on CNBC's Mad Money show yesterday, has said the markets are going down next week and to take some profit as a strategy for protecting your nest egg. It is time now not to delay as hard times are coming.

Now let me dispel one notion. I do not want the markets to go down any more than you do. All I am trying to do is not to stand in the stream and try to fight the current. My strategy is to move with the current and flow. I try to ascertain when the current is changing direction, so I can move with it. I AM NOT TRYING TO INFLUENCE THE COURSE OF THE RIVER! It is the world leadership, which has set in place the conditions which will precipitate this calamity.

I know I may offend some here with this view, but, In my view, it started during the Reagan presidency when we had massive tax cuts for the wealthy and built a debt which has gotten way out of control. We can agree that for the most part, no one Party or President has really lowered the debt since Ronald Reagan and maybe even Carter, if you look at the chart above. Some of it was from deregulation for sure. It's our fault as citizens for not holding our elected officials' feet to the fire and for not paying for things we should be paying for or not having them in the first place. The war in Iraq comes to mind here.

But I will let historians argue over the causes of this impending setback to our easy way of life. Although many are now suffering because of unemployment, lost savings for retirement, or some major health issue which made them bankrupt. The suffering is out of view and we don't want to look at it any more like we are not wanting to look at those birds covered in Oil from the Gulf.

To get grounded back into the market conversation, I just ask you to contemplate this question: Would you agree that things don't look that promising out there for any stock market rally? Then what are you waiting for, another kick on the side of your head (pocketbook)? If you need more convincing, go back a few days and read my post on the Positives and Negatives in the World today and make up your own mind. I am only trying to help you face reality so you don't suffer any more. You can't blame me for trying.

One last word, this decline may play out over a number of years as nothing. Even the year 2000 drop of the Nasdaq took some time to bottom out, as it was in late 2002 when that interim bottom was hit. This will take a comparable amount of time. There will be short rallies to play if you have the time to devote to the market, but it will be trading, not investing. The overall long term trend is down! Just keep that in mind, as you trade. It will be for survival.

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