Saturday, July 31, 2010

5 Year overview of the Dow and S&P500 (UPDATE)

I have posted 2 charts this morning showing where we are relative to the longer term market trend because many of you are wondering whether we are going back up to new highs in the market. The news outlets are full of people who are predicting just that and say that the worst is over and we are ready for as breakout to the upside. My data analysis suggest that is not going to happen any time soon. I believe we are now most likely to drop over the next few months and into October, as we end Q3.

Let's look at both charts above for a moment. There are similarities in the pattern of both charts and I have added a blue downtrend line for each, which we will not go above, and also a red resistance line, also a barrier to moving higher.I know looking at a 2 month chart gives you a sense we might be going up over Dow 11,000, but I am confident that is not going to occur. We closed at Dow 10,466 yesterday. The last 4 days have been down in the Dow, not up and while yesterday's market action for the Dow was impressive, as the Dow was up much of the day in the face of headwinds caused by a lower than expected Q2 GDP number, it still had negative distribution if you look at the Volume chart.

I have been disappointed that so many have been fooled by the media and aren't really giving as much weight to the economic data for the past week. There were many negative readings for the week if you check the previous post. This is not an economy in real recovery. It is weighted down by the Consumer not really seeing things better from their day to day experiences. Until that changes I am sorry but the economy won't really recover as we hope it will. We are unfortunately in this mess for years to come. My guess at least 5 years from a Housing and Jobs point of view. More foreclosures are lining up this Fall, as Adjustable Rate Mortgages must refinance to Fixed Mortgages, over the coming 6 months to a year and which were set 5 years ago. Many of these people borrowed on their equity and assumed prices would continue to go up as they had for many decades. Unfortunately this group is most likely most vulnerable to foreclosure as they are retired people who borrowed the equity on their homes and now their homes are under water. It is so sad.

UPDATE: Sunday 6:00pm PST

I changed and updated the original S&P chart from what was posted. Notice that on the S&P chart I have drawn 2 blue lines. Notice that when I connect the #2 Blue line under the last "W" pattern and extend it back over the 5 years, you can see it touches all the low points, this before the market had problems in 2008. To me the use of software program trading has resulted in patterns like this. It isn't just coincidence this happened. It is programmed to. This 2nd line does not show a similar analysis for the Dow. It is likely we will stay bound in the S&P between these 2 blue lines although the #1 blue line is not as much resistance as is the solid red horizontal line which crosses the axis at 1,190.

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