Dow 30 year chart: What is it telling us?

As we begin a long 3 day President's weekend, I thought a look back on this stock market climb. At first glance the Dow chart below shows a downward slanting "W" pattern, or, as many technical people call it, a Head and Shoulders pattern. But while that's an important point of this chart as the recent climb has been impressive, what I want you to look at is the bottom chart which is of Volume over the past year. You will see on that lower chart an average volume red line but notice in the last year the volume has declined to a low of the past 10 years. When volume is strong and price is increasing it is quite Bullish. When price rises and volume declines significantly, that is quite Bearish. In this case, there is no question that the entire climb of the past year has been on very low volume. You see it has been climbing without the individual investor participation. This rise has exclusively been down by the Fed and it is not sustainable indefinitely. The longer this market goes up, the bigger the fall. Don't be greedy. Take your profits and be happy you have them. Keep what you have then in cash and just wait.

Click on the image to enlarge it if you can't make out the details.

Market outlook: June 24th with Updates

This morning's economic data has been reported. First, May Durable Goods orders were down -1.1% for May. It was up over 3% in April. This is the first month it has been down in 9 months. Then Jobless Claims were reported down to 457,000 from 476,000, a drop of only 19,000 claims. But that could be because Congress did not pass extending Unemployment benefits for the long term unemployed. So I wouldn't be feeling better over the smaller number quite yet. Of course they haven;t mentioned that in the numbers or the media because they don't want you to be feeling anything but good right now. It's called manipulation. Have you ever asked yourself this, If the economy is truly doing better wouldn't we be feeling that and there wouldn't be a need to manipulate us? Hmmmmm.

Moving on, Futures are pointing to a lower opening. The Dow is down about 35 points, the Nasdaq is down about 14 points, so we shall see how this day unfolds together.

The chart patterns for the Dow, S&P, Nasdaq and Russell, according to ElliottWave Forecast web site, shows Bearish outlook for the Short term (Weeks to a Month), Medium term (1 to 6 months) and Long term (6 Months to a year). This is the first time all three periods have been Bearish.

Remember those Support levels going into today. For the Dow, that shows S1 at 10,227 and S2 at 10,157. Yesterday's close was 10,298. On the upside, R1 Resistance is at 10,368 and R2 is at 10,438. I don't see us going back this high, I am more concerned about breaking below the Support levels for those still holding stocks in hopes of a turnaround. For the Russell 2000 Index, S1 is at 637 and S2 is at 631. This Index closed yesterday at 644.

Those holding Put Options on stocks or Indexes can relax right now, as when the market drops, they make money. Same is true for my TZA Call Options, as they should rise with the Russell 2000 dropping, because they are based upon this Triple ETF Ultra Short. In pre-market, TZA is up 3% with the Russell Index Futures down.

Update: 8:00am PST

As you can see from the Intraday chart above, the Dow has dropped about 110 points so far this morning. As I say that, I can see the W pattern being formed and most certainly this next leg down will go below these low levels. Watch S2 support level for the Dow as that would take us down 150 or more points in total.

Update: 12:15pm PST.

We went below S2 on the Dow and are now down about 152 points at 10,140. We still have 45 minutes to go but I believe we are going even lower in the remaining time. I do not want the market to close at the bottom today so hopeful;y it won't as it would form a Hammer pattern and that would indicate a reversal is coming and the market would go up. However, it would be inconsistent with the news out there for the market to rise. It needs to go down and we all know it, the quicker the better. As you can see there is a very steep "W" pattern pointing almost straight down to contend with here. We have now hit a new low today of 10,132.

Where are we going?: Latest on the stock market trend both long term and short term

It's time for one of those posts where I take a very lofty view of the stock market and a minute view at the same time and explain to my readers how I look at the market from day to day when trading. To do this I have put up many charts staring as long as a 30 year chart of the Dow to as small as an Intraday of yesterday's trading. I hope this helps you at least see what I see. Let me start with the broad view using the Dow 30 year chart.

As usual, I will look at each chart observing "W" pattern formation. As I have noted here before, these "W" patterns are often referred to as Head and Shoulder patterns. I suggest you read up on on these patterns somewhere like Investopedia, which has a significant wealth of facts and lessons for any investor. Getting back to those "W" patterns, I will underline in red each "W" pattern I want you to be looking at and we will be looking for which way the slant of the line appears to be heading. If the line heads down, it implies the market will follow by going down below the bottom right leg of the "W". If the slant points upward, the market should go up.


Looking now at the Dow 30 year chart above, you will notice the "W" pattern of the stock price and the fact that it is slanted down. To me this means that although we have made highs of 11,000 recently and 14,000 before that, we are headed lower and should go lower than the previous low, which was at 6,400 on the Dow. That seems to contradict conventional wisdom by the "experts" on CNBC and others who have said any correction will go to Dow 8,000. If that were so, then the previous low would not have gone below 8,000 and there would be no slant of the "W" pattern. So that is one thing I wanted you to see along with me. But there is another interesting point to be made on this chart, but it doesn't involve the stock price, but rather, the Volume in the bottom section of the chart.

As you can plainly see, there has been 3 distinct periods where the Volume made a significant step up. I have drawn Blue lines to define each step. The first step was from 1980 to about 1988, the second step up from 1988 to 1998, and the last step up from 1998 to now. But in this last step, it looks to me that the Volume is increasing steadily over this 12 year period .Just think, the Volume was significantly lower just 10-15 years ago in the buildup to the year 2000 Dot.com bubble bursting. I don't know many investors who have increased their purchases of shares over these past 10 years and yet the Volume is over double the previous period. Part of the explanation could be that the bank shares like Citigroup, symbol C, have dropped in value so much that there are Billions of shares traded now compared to previous times, but that doesn't entirely explain it.

To me the only explanation is that the Government has been using its reserves to keep this market sustainable at these levels through firms like Goldman Sachs and others these past 2 years investing with nearly free money from the government. It's a way fro the government to make money too since the wealthy don't want to be taxed.

Anyway, I think this Volume will eventually drop as people get more scared and leave the market as their gambling table of choice. Any major market drop will scare a generation of investors away, as may have happened in the recent drop to 6,400 on the Dow. Ok, now let's move on to another chart.


This next chart above is off the Dow for the past 10 years. I have underlined several "W" patterns to show you again the predictability of this pattern at determining the market direction immediately after the "W" pattern is formed. Several of these in this chart show this to be true. You will notice the last "W" pattern I drew in red to the right of the chart appears to slant down. This will be clearer in shorter time period Dow charts to come. The other thing to look at on this 10 year chart is the volume spike near the low of 6,400, when Volume increases and price is dropping it is very bearish for the market. Same is true when the market is going up on high volume. However, if price rises on low volume, that too is bearish.


This 3rd chart above, shows the Dow for the last 1 year period. I have underlined a number of "W" patterns here as well. As you can see in this last period, the "W" pattern was flat. This implies the Dow moving sideways, not up and not down. It implies a tight range until the next "W" pattern emerges.


And lastly, the final 1 month chart of the Dow. I have drawn 2 red lines. Let's focus on the last one which points up. We can't tell much form this except that the market should go up from this latest rally the past few days, correct? However, the previous red line under the "W" pattern is slanted down and it has not yet been fulfilled. It may be a fluke. Remember I have said these aren't 100% accurate predictors, but rather about 90%. However, I conclude 2 things from this. First, is that while it might be a fluke, the Dow will not go too high from here. It possibly could go as high as Dow 10,500-10,600 range, as I have mentioned a few weeks ago. However, it may just fizzle out and return to another major drop on any negative trigger. I would be cautious trading here. And Volume is barely hanging in this past week at 200 Million shares where if you look at the 30 year chart it looks like the average for this period should be more than the 200 million shares.

So what do you do when the signals are mixed? I can't tell you what you should do, but I can tell you how I am thinking about it. Because the short term is so murky, I pull back to what I do know. That takes me to look at the 30 year chart. So while I mark time, I keep in mind that the overall trend will be down, so if I am going to buy any stock Puts, I can wait a bit and if the market rises, I should be able to get them cheaper. I most likely won't risk buying any stock Call Options either. And lastly, waiting until there is clarity is just fine as well.

I am sitting on a number of TZA Call Options. My latest purchase was for $1.55 each for a Strike Price of $9.00 for October. I also purchased some Puts on a Dow index stock I will keep nameless.

I hope this isn't boring and has been informative. Good luck out there. Next week the key Leading Economic Indicators I will be watching will be these:

Wednesday PPI, Core PPI, Housing starts, Industrial Production (expect PPI to be negative)

Thursday Jobless Claims, Consumer Price Index, Core CPI (Watch for Deflation in Core CPI numbers)

That's it from here. have a nice weekend. And remember, there is nothing wrong with taking profits and being in cash right now. It is the only safe place to be contrary to the hype out there in my view. To make this point further, click here on a video clip of Maria Bartiromo of CNBC's Closing Bell interviewing Bob Prechter of Elliott Wave International.

Market update: Market up but Volume declines for consecutive days

As you can see in the chart above, the Dow 6 month chart shows that while prices have been going up, the Volume has steadily declined for each of the past 4 days. While I know that a market going up is some comfort to those who were scared last week, it is important to realize that a rising market on lower volume is a very bearish sign.

The second chart is a 1 year chart of the Dow and it shows that we remain below the previous support level and therefore the bearish setback is still present. I am using the rise to buy more TZA Call Options and to sell some stocks to raise cash.