Stock market trend and prediction going into September and beyond

It's the weekend and we have time to think, rather than do. So this morning I am going to put up a number of stock market charts and analysis to try and make sense of where we are and where we are headed. It has been a tumultuous few weeks and many are glad we have them behind us now. The past 2 days advance to yesterday's August Options expiration got many nervous. They thought we were on our way back up this week only to finish down, back at or near the recent lows, depending on which Index and Country's stock market Indexes you were looking at.

With that background, here are some 3 month charts of selected European Indexes, which should help you conclude that the recent drop in US stock markets isn't just about the US. But first 3 charts are of the US Indexes; the Dow, S&P and the Nasdaq. Then I have followed them with commentary and with charts of German DAX, France's CAC and finally Japan's Nikkei. All are 3 month charts and the thing to focus on is where are the indexes now, the similar patterns and whether the recent drop is slanting down or up or flat. If there is a predominance of slanting down below the other recent low points, we are going down more. Now the charts!

The Dow chart shows we are nearly flat across the low points. You will see in the S&P chart below, the same is true.


You can see the there is a biased slant down on the Nasdaq as this chart above does point a further down move.

The DAX also shows a slanted move down below earlier lows.

The CAC is flat at the lows, like the Dow and S&P.

And lastly, the Nikkei slants down significantly.

So what does this all mean? Well, I ask myself the question, Which world indexes are extremely important right now and which have been long term indicators of either prosperity or leading the way down. Those indexes have been the Nasdaq here in the US, Japan's Nikkei and Germany's DAX index. To me they all say we are headed down lower. You will have to make up your mind which tea leaf you will follow. Good luck on that.

One other important thing I look at. I look at the longer term chart. Here's the Dow going back about 30 years. You can see from the chart below, we are forming a head and Shoulder pattern over this period and it looks as though it has completed the formation of the right shoulder and it is a slanted down pattern.

This signifies we may ultimately be headed down to retest the lows of 6,400 eventually and may not hold at that level. Given world events which seem to be changing daily in a negative direction, I would not be surprised to see this scenario to play out. Anther thing to remember is this, markets tend to rise much more slowly than the speed of which they go down. This chart shows that clearly.

Looking at roughly the same period for the Dow/Gold ratio you will see the high point is at year 2000. All of these points were taken at 1/31 of each year, except the last point and that is Friday's data. So the trend for the ratio is continued down. The implications for this are that either Gold will continue to rise to get the ratio back to the 1-2 level again or the Dow will drop significantly while Gold either stays high at current levels or goes down some at the same time. For the Dow/Gold ratio to be at 2, then either the Dow must stay at 11,000 and Gold goes to $5,500/ounce. Or Gold to stay at $1800/ounce then the Dow must drop to 3,600. Neither scenario will really happen but adjustments to both are a more realistic possibility. Assume for a minute the Dow does go and retest the 6,400 level, and Gold pulls back to last years level of $1200, that would yield a Dow Gold ratio of 5.3, which is very close to where we are today!!

This last chart below is my short term read of the top limit of any dead cat bounce of the Dow. You will notice the last false bounce above the red line and decline to follow the earlier trend down. This was a bear trap. I stepped in it and had purchased some TNA Call Options thinking we were on our way up again as we did before. I was wrong, but luckily didn't buy many. Watch for more of these false moves, as I believe we are in for a steady, but jerky decline. That red trend line shows that we could still reach back up to the 11,000 level, but as the slope of that red line indicates it will be short lived.

So with European debt rising quickly and many countries unable to pay their debt, we are facing country defaults, not just company defaults. Think of Lehman Bros. when you think of market reaction and multiply that by 10 to see the implication of a country default. I wish and hope it is not so, but one must be prepared for the worse and survive it. Good luck to you. Where do you think we are headed? Comment below if you like. I screen comments only for improper language, so there may be a delay before you see your comment posted here. Thanks!

The stock market: Where's the short term bottom?

Here we are with another day of opportunities or crisis. The Nikkei is down tonight 420 points at this hour to 8700 on the Nikkei 225 and the Hang Seng is down over 1200 points to 19,128. The big question is this, where is the bottom for our market and when will it bounce up a bit and stabilize. Based upon Asia, I would say we are going to go down more than where we are now on Tuesday. The chart below is where I see a stand taking place between the Bulls and the Bears, with the Bears winning the momentum game at the moment. The blue horizontal line at 11,000 now becomes the resistance level for the Dow, if the market does turn up. The red line at the 10,000 level is support for this market. It should make a stand between these 2 lines and stay between theses 2 levels until direction of the economy and the actions taken by the G-7 and G-20 becomes more clear. Italy's debt is still a major market concern, even though we tend to focus on our markets and economy right now.

If you haven't read the posts of the past few days, it would be worth your time. Thanks for visiting.

Market comments for June 16th

Another day and another market drop. The Dow closed down again yesterday as did our other Indexes. We start today with the Nikkei and European markets down again today because of the turmoil in Greece. Our Economic data was a little better this morning with Initial Jobless Claims dropping for the week of 6/11 to 414K. Expectations were for 425K, so this is a bit better and in the right direction.

Yesterday we closed with another consecutive day when the Put to Call ratio was =>1.00 for the 11th consecutive day. Yesterday's chart shows the history of this indicator and let's face it, people don't really feel that well about the economy or the stock market and are selling, rather than looking to buy on the dips. As long as that mindset is present, it does portend good times ahead for the Bulls, but does for the ever louder Bears.

Today's chart below is of 3 months for the Dow. Of particular interest to me and should be to you was not only the fact that we are getting lower lows and lower highs on bounces, but that the down volume is much stronger than the up volume. Yesterday, the volume was stronger than the previous 2 days of the market rising slightly. And then before that, the volume was higher too. The trend is still down, but we haven't yet gotten to the real scary drops that are coming. Don't say you had no clue of this coming!

The culmination of this in the form of a sharp deep drop may come in the next few weeks. Much is riding on the negotiations of V.P. Biden and the Congressional leaders who are trying to get enough votes to pass the legislation to raise the debt ceiling. It looks now like somewhere between $1 and $2 Trillion dollars will be reduced over the next 10 years, in the level of debt we have. However, if neither political party did nothing, the debt would rise $6 Trillion with what Congress has already approved. So cutting $2 Trillion is a step in the right direction, but not enough. We will be revisiting this issue for the foreseeable future. In the mean time, everyone knows that and many don't have the confidence to buy stocks, so drip, drip, drip, the market goes.

Today is the 100th Birthday of my former employer of 18 years, IBM. Happy Birthday, IBM! It was a great company and still is.

And lastly, I want to thank all those who wrote me privately yesterday on my Cisco article. It looks like many outside AND inside agree with my comments.

Market comments for March 15th UPDATE

Japanese stocks overnight had a terrible day dropping over 1000 points. The Futures are showing a drop in all US Indexes of about 1.5% to 2.3%. The continuing explosions at the Nuclear Reactors are causing concerns all over the world where Nuclear Reactors are used. Many lessons will be learned here in the next few years but for now panic is settling in all countries, including the U.S. It's hard not to see a connection to the Japanese stock market and the troubles in Japan as the cause of our market drop. But our market started to drop much before the Earthquake in Japan.

I expect the market to drop again and then have a rise but the rise will be a lower high than before and we will continue to make lower lows as I have stated here for a number of weeks. If you don't want to sell your stocks, then buy a hedge like some Ultra Short ETFs like TZA, SOS, FAZ and any others that go inverse of the Indexes they represent. It will help cushion your losses. But again, think if this is a longer drop, it might be better to sell now and take some profit and repurchase much later when stocks are cheap. The chart below is my best guess at Tuesday's action in the Dow. Notice the constant slide of the Dow drop.

UPDATE 5:40pm PST

Here is the actual chart of the Dow after the close today.

What's going on in the stock market? Market comments on Oct. 2nd.

It's time for charts, plenty of them. I have been looking at where we are regarding the U.S. stock market lately and comparing it to a number of other indicators such as, the price of Gold, the Nikkei 225 stock market index, the U.S. Dollar and the Japanese Yen. All this to get a better picture of the real value of our assets and the implications for the future. I have also been compiling charts on 10 year Treasuries vs. the S&P 500, because all of these measures do have a connection to each other and therefore paint a truer picture of reality.

The average person has no clue as to what is going on. They are too busy using Facebook, Twitter or other Social Media, they don't watch the News either. They work, play, connect and as long as they have some money in their checking accounts, they are happy, sort of. But the country is changing all around them and so far only some have been upset. Those upset have been labeled as crazy Tea Baggers, and while many don't really understand the data, they know what is happening is not only bad, but it is also making them furious. So let's take a look at the charts and see what is going on.

The first set of charts below are of the price of Gold in U.S. Dollars and in Japanese Yen over a 5 year period. The charts show that during this period, the price of Gold went up 172.7% in U.S. Dollars but went up only 107.5% in Japanese Yen. This doesn't mean you could have made a bigger profit if you bought Gold here vs. what someone in Japan made. It means that our currency has devalued much more than Japan's. Or to put it another way, your ability to buy goods and services are being diminished when this happens. If prices of goods and services remain the same here in the U.S. over the 5 years, then this means that the real value of these goods is declining relative to the rest of the world. Japanese Consumers could buy the same goods and services for much less Yen over the same period, than what we must pay. It means our Homes values are dropping more than what is apparent by looking at the current price realtors list homes at. If you add in the depreciation of the currency, the drop is staggering.



The second set of charts below are of the Nikkei 225 vs the Dow and the S&P 500 over a 2 year period. You can see from both of these charts that the spread between the Nikkei and Dow has been widening to its greatest disparity over the 2 year period. The same is true for the S&P 500. Of particular interest is the Sept. 1st point of the Nikkei which was at the lowest point since May 2009. These Indexes have tracked over many years, but lately (since May of 2010) the spread has been widening. Notice that the spread is wider between the Nikkei and the Dow than the Nikkei and the S&P. I have said that the Dow is much more easily manipulated as there are only 30 stocks in the Dow Index.


To show how these 2 indexes have tracked over a longer period I have included 30 year charts on each index. You might want to know why I have selected the Nikkei Index and wanted to show the comparison to our Dow and S&P. It is because Japan has had several decades of similar financial troubles with their economy and tried many of the actions we have tried and continue to try to get out of our biggest recession since the Great Depression of the 1930's. Japan's time has been called the "Lost Decades". So here are the charts, complements of the web site, "Interactive Mathematics". I am going to post their charts below here and also their commentary, which I found illuminating.

Here is chart of the DJIA up to the end of August 2010.

In the late 1980s, Japan had explosive growth in sharemarket prices, similar to the DJIA in the late 1990s. The euphoria in Japan was driven by healthy export growth, but especially by a housing and construction boom. The real estate bubble burst in the early 1990s and the Japan market started to plunge. Japan has been in and out of recession ever since, and the latest stock meltdown from late 2007 has seen the value of the Japanese stock market return to values last seen in early 2003, and before that, in 1983.

Investors who were in the market during the 1980s did very well, but since then, many people have lost a lot of money.

The main stock market index in Japan is the Nikkei 225, which is an index of the top 225 companies in Japan, something like the DJIA in the USA.

The graph of the Nikkei 225 from 1967 to end August 2010 is as follows:

The early part of this chart is quite similar to the exponential rise of the DJIA and it is interesting that both stock bubbles were in part fuelled by real estate bubbles. If the DJIA unwinds over the next 20 years in a similar fashion to the Nikkei, we might see a return to values last seen in the 1980s.

In this next graph, I have superimposed the DJIA (in dark red with red scales) and the Nikkei (in dark blue with black scales). The period from 1970 to the peak in 2007 for the DJIA has a remarkably similar shape to the runup for the Nikkei from 1977 to its peak in Dec 1989.

The wipeout that followed the peaks is also very similar. The Dow's low of near 7500 in Oct 08 corresponds to the Nikkei's low of around 20000 in late 1990.

Since its peak, the Nikkei has basically been on a downward spiral.

Here's an exponential decay model for the Nikkei, from its peak at end 1989 to the end of August 2010. (Note the negative in the exponential term):

Many commentators are saying that the Japanese did not address the issues regarding bank disclosures early enough in the 1990s and that's why their economy has never really recovered. However, the US Federal Reserve has already reached 0% interest rates (like the Japanese did) and have nowhere else to go now except for stimulus packages (like the Japanese have been trying, with little success, for 20 years.)

So are we headed like Japan? I don't know, but many of the actions the Fed has taken is similar and this comparison has not been lost on commentators. The comparison continues to be made. So when you see the indexes diverging to extremes, we could be facing a snap back in our Dow shortly.

It is important to continue to look at charts as they do show what is truly going on. Lastly I will show the Fed's action in managing 10 year Treasury yields through "Quantitative Easing" or QE 2, as it has been referred to. This chart clearly shows that the Dow has lost its tracking to this index and most likely is because of Fed intervention.


In summary, people are unaware of what has happened to their wealth. It has been the biggest transfer of wealth in the history of our country. It is the fault of the Fed and people like Larry Summers, Hank Paulson and others in dealing with these issues in the methods they have chosen to use to resolve them. None will work. In fact, they have made things worse as now the stock market has no real connection and tracking to the real economy. It is being manipulated by Institutional Investors who rely on market gains for their bonuses. It is irrelevant to them that the real intrinsic value of our currency has been declining rapidly. They figure they make so much money, even if it is depreciated in value they are making it up in Volume. Sad, sad days. And if you think a change in the mid term election is going to fix this, you are sadly mistaken. We need a complete mindset change to fix these problems and we aren't conscious enough as a society. Unfortunately change most often happens at the lower levels of consciousness. That is where our society is right now.

Market comments for Aug. 23rd

I thought before I make any comments about tomorrow that I would show a few comparison charts of the Nikkei and Dow over a 1 year period, as well as the Nikkei vs the S&P500. Both charts are using Log scale. You can see from the Nikkei vs. Dow chart that the Dow has not dropped compared to the Nikkei. It has trended up the past month while the Nikkei has retreated to the bottom of this time period, as indicated by the red line. The S&P 500 has also risen but if you look at the last few chart points it has dropped lower than the Dow for the same period. Again the gap between the lines are at the widest over the one year period. I believe this is indicative that are markets are more out of touch with the reality of the economy and are artificially inflated. However I believe these charts will show narrowing between the lines as the Dow and S&P get closer to the Nikkei and all will drop shortly.

Not any real news on the economy being announced tomorrow so we may get a short tempered rally after Options expired last Friday. Tuesday and Thursday are more important days to watch for economic news. Thursday's are always releasing Initial Jobless Claims and on Tuesday we get data on Existing Home Sales. I will post all the economic data in my next Blog post and what to expect this week. Don't forget to come back.

Monday June 7th Pre-market

Futures are down as the Nikkei plunges. Currently down almost 400 points at 8:46pm June 6th. It is going to be a follow on crazy day of market action. But it is consistent with the reality of the economic conditions facing us and Europe. European leaders seem to be bickering over the direction of monetary policy of the EU. Tim Geithner, Treasury Secretary is pleading with them to implement a Debt rescue plan, according to reports this weekend on Bloomberg.com. Check in during the day Monday for updates and intraday chart analysis.

Nikkei vs Dow 2 year chart

As a follow up to yesterday's charts on the Nikkei and Dow I have another chart today showing both indexes plotted on the same 2 year chart. As you can see there has begun a divergence of the 2 Indexes. The Nikkei has been going steadily down of late as the Dow continues to rise. It is my strong belief that the Dow will turn down and join the Nikkei once again, as the 2 indexes do track each other very well. At this time their spread is greater than it has been over this 2 year period.

With the Dubai troubles over non payment of their loans, this could increase the magnitude of the reversal. It's a good time to be on the Short side of this market. The ETF, TZA, should increase, as should FAZ as both are Ultra Shorts. TZA is a Triple Short of the Russell Index and FAZ is an Ultra Short of Financials.

Note, the chart is on a Log scale.

Both short and long term stock market outlook: Successful retest of the lows and then a Bull market rally

As today closes the week of the stock market, I was influenced in posting what I did today by a commentary yesterday on CNBC by a technical analyst who had a chart of the World stock market Index which showed all markets had started to drop in the May and June timeframe. This drop was consistent across the world and was not particular to the U.S. stock market. He said it implied this drop is a world phenomena and therefore it will take the world to solve it.

I have been following the Nikkei 225 stock market Index for some time but have never posted it and the Dow as 2 separate charts on my site until now. The main thing to compare is how quickly the Nikkei showed the downturn coming before the Dow has but both charts are similar when looking at a 3 year history. Below, in the first chart, the Nikkei 225 shows they have had a double bottom which was down to about 6,500 and if we return they will have put in a triple bottom. Usually triple bottoms are solid enough of a support level foe the possible beginnings of a real Bull market rally. This is what I will be looking for as the months going into the Fall will tell if this plays out.


The Dow chart below shows we did not have a double bottom yet and that is part of the reason I am quite confident we will retest the low of 6440 on the Dow, by this Fall and certainly by October Options Expiration, which occurs on Friday, October 16th this year. This could signal the moment of an attempt of a return to the beginning of a Bull market rally, which would go above the previous high end of the range of 9,300 on the Dow. This time the S&P 500 could go back above 1000 and it will be the time when I am buying heavily at hopefully the market lows. Time will tell if this scenario plays out as much is unknown as to the outcome of the crisis in the economy. But it certainly would set the stage for 2010 and hopefully a more optimistic outlook as the peak of the unemployment should give hope things are going to turn around mid to end 2010.