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!

Dow charts and what they suggest.

I have put together 1 year charts of some of the Dow 30 stocks below and the overall chart of the Dow Industrial average for a comparison. We are at a very critical juncture in the market right now as we have extended the rally now to what appears to be a peak, after having weathered a recent drop in March. The question on everyones mind is whether this means we are going to go higher on our way to 14,000, stay in a tight range or tip over. For some clues, looking at where individual stocks of the Dow are currently, might help us. A number of the stocks that make up the Dow, clearly show they have been leaders over the past year. Leading the gains in the composite Dow over the past year include CAT, DIS and HD. None of the other stocks gained as much from a percentage point of view. Here's a summary of the gains by stocks from the lows around May/June of last year to Friday's close in descending order of percent gains.

CAT 100%
AA 80%
DD 72%
CVX 69%
XOM 55%
GE 54%
PFE 50%
VZ 50%
HD 46%
KO 43%
T 38%
IBM 38%
DIS 38%
UTX 37%
JPM 34%
MMM 31%
TRV 30%
BA 29%
AXP 21%
MFST 19%
MCD 19%
KFT 18%
WMT 13%
MRK 10%
JNU 7%
PG 0%
INTC 0%
HPQ -6%
BAC -13%
CSCO -26%

THE OVERALL DOW JONES INDUSTRIAL AVERAGE HAD A GAIN OF 28% FOR THE SAME PERIOD.

Now, to get a sense of market direction in the coming weeks I decided to focus on the leaders to see what has happened in the past 3-5 days looking for weakness. CAT for example has turned down. AA has paused, as their earnings are to be the first released this week as earnings season begins. DO has also paused. CVX seems to continue to gain as OIL has gone over $110/barrel, so it's continued move up does have a context. The same is true for XOM, it's the price of oil. GE has turned down the past few days. So I have concluded that if Oil prices had not surged, this market would be dropping. Given that premise, oil prices shouldn't surge much from here, unless there are new problems in the Middle East besides Libya, say in Saudi Arabia.

I know the news of avoiding a shutdown of government is a good thing but I don't see much of a rally from it next week. If there is any rally, it should come from Earnings reports. I'm expecting the rally to stall and flounder. Other experts believe a rally is in order. This is definitely a real possibility but at the end of this last push higher is the precipice where stocks will drop sharply as the big scary decline begins. Below are a few of the charts for individual stocks in the Dow and the Dow itself.

Market commentary for Dec. 30th, 2010

The Initial Jobless Claims number, released this morning, came in below 400K for the first time in several years at 388K. Expectations were for it to come in at 415K. But the previous week's data was revised upward as usual from 420K to 422K. It is not surprising to me that the number came in this week at 388K because last week was Christmas week. The real test of the numbers will come in 2 weeks. Many in Main St. media are saying that the big corporations are adding jobs, but they are hiring abroad, not here in the U.S.. But if you think about it, we only had a 4 day work week at best last week, so 400K jobless claims divided by 5 days would equal 80K a day. With only 4 days you would think it should have been less than the 380K. It should have been 320K.

Continuing Claims increased this week oddly enough from the last reading of 4.064 Million jobs to this week's reading of 4.128 Million jobs. Expectations were that the number would come in at 4.000 Million. That number is going in the wrong direction if one is looking for a lower Unemployment rate number next week.

The Futures market is down slightly on the Dow. European markets are all down currently and the Nikkei closed down last night. Today may signal the beginning of the market drop we have been expecting, although Volume will be light this week. Yesterday's Dow hit 11,621 for a new intraday high, but it closed down below 11,600 to 11,585. A down day today might accelerate the drop going into next week. We may still see a day or two to close at 11,620 but then a selloff will begin.

January should be choppy and a down month from current levels and that should set the expectations for the year, as the month of January is often cited as a determinant of how the Dow will end the year. If January is negative they say the year will have a loss. Key short term levels to watch is going below 11,460 on the Dow. We have completed the top of the right Shoulder of the Head and Shoulder pattern now, as seen on the chart below. As you can see from the sloping line under the head and Shoulder pattern where we are headed from here. It isn't pretty. So be cautious in your purchasing of stocks. Consider hedging with some short positions or ETF Shorts to protect your profits. Taking profits here aren't that bad an option either.

Stock market prediction going into January

I have been looking at the chart of the Dow and decided to look at a 6 month timeframe as it seems the market has been going straight up, although lately seems to be still strong. I wanted to determine whether the Bulls case is warranted and whether there are any signs visible to the average investor with limited knowledge that all might not be as good as all the talking heads are saying. You can't find anyone Bearish right now, except Robert Prechter and his Elliott Wave Theory. Well while I do like the Theory I also use other methods, as long term readers know. Besides the Put to Call ratio, which I like a lot as an indicator of a pending reversal in the market, I also like to use Price/Volume with the emphasis on Volume movement. Today's chart below shows the Dow 6 month Price and Volume movement over the period.

What you will notice from the above chart is that the Volume has been steadily declining over the period. That's the first note worthy piece of data. In fact in the month of December we are at the low on the chart. Even July had much more volume than did December and most are on vacation then.

The other noteworthy consideration is that the price has all but gone steady up on this lower Volume. First rule to observe in trading is that if you have price rising, volume needs to also rise if you want to have a Bullish condition. But if the price is going up and the Volume keeps dropping, as it has especially lately, it is a very bearish sign. Also note the number of recent days which have been distribution days, in red, versus accumulating days, noted in Black on the Volume chart.

To me the signal couldn't be more emphatic. This indicator is flashing RED in Neon lights. Does this mean that next week the market will tank? No, but it should make you wary as to how much you are invested in the market rising right now. There is better than a 50% probability that the market will be turning down soon. It is way overbought by any measure you use. Buyer be Ware! Don't say you didn't know. And ask yourself how can all the prognosticators except one, be on the side of the Bull at this time. And don't tell me it's the Fed. They only have so much they can do.

The war between Fundamental Analysis and Technical Analysis is being played out in the stock market. What is it telling us now?

I have been thinking about this post for a while. It was triggered by friends who see the stock market in diametrically opposed positions. It appears to look like a Bull versus Bear argument but it's really not. It is the difference between those who use Fundamental Analysis and those who use Technical analysis to make decisions about market direction and trading decisions and whether to Buy, Hold or Sell. In order to get at this problem, I must first explain the difference between both analysis techniques. For that I will use the 4th Edition book by Martin Pring titled, Technical Analysis Explained. It is considered the bible for those interested in Technical Analysis. I will not make this too lengthly, but it is important to lay this foundation before I get into where the market is going to go and why the opposing positions have the positions they do. I will conclude with a number of charts and some support for the idea that while the disparity will continue between these two positions, one position is going to lead the way into the future as it is doing right now behind the scenes.

Ok, here we go. "Technical Analysis in nothing more than a tool", says Martin Pring. But a very good tool I might add. "Technical Analysis is based on the assumption that people will continue to make the same mistakes they have made in the past." According to Investopedia.com, "At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. If the price of a stock trades below its intrinsic value, it's a good investment.

Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.

So currently the argument, for those using Fundamental Analysis, goes something like this. The S&P 500, based on historic terms is trading at about 21 times trailing price-earnings ratio and therefore is cheap as an investment today. That compares to the historical average of 16.4 since 1881 and is at the top end of the range pre-2000. The S&P 500 is expensive on a long-term basis, but and this is the big but, inexpensive compared to the past ten years. (Source: Prieur du Plessis)

Technical Analysts say, "Look at the charts! We are ready to drop significantly!" What do they base that argument on? A Head and Shoulder chart pattern. Let's take a look at several charts and explanations of the Head and Should pattern from several sources. The first chart shows a Head and Shoulder pattern looking at Oil prices back in time with an explanation on how to read the chart information.

This second chart shows a classic head and Shoulder pattern on a usual uptrend similar to the latest market movement this past few years.

This 3rd chart depicts more closely, the current market trend of the past 20 or so years and how to determine how far it should drop, and shows the neckline to measure the amount of the expected drop.

And the last 2 charts show the Dow and S&P 500 for the past 30 years and the big Head and Shoulder pattern we are starring at as Technical Analysts. It explains why many from this camp are very worried about the future.


One other very important relevant piece of information, High Frequency Trading now controls about 70% of the market volume traded in a single day (Source, 60 Minutes broadcast of Oct. 10th). It has also been determined by the SEC, that the single one day crash on May 6th where the market dropped over 600 points in 15 minutes was caused by the High Frequency trades made. It was caused by an algorithm (a set of rules to be followed in calculations and problem solving by a computer). Since May 6th, the SEC has instituted trading curbs, which stop the trading in any security which drops 10% in a short amount of time. Since the trading curbs have been in place a number of times the market has had to be stopped because of similar algorithms by other firms had glitches. The market is not being run by the individual investor, it is being run right now by computers, which were set up by humans, who tend to repeat the same mistakes, as I stated in the beginning of this piece. This is why I like Technical Analysis. You know we humans are going to panic at some point in the very near future. What will be the trigger is anyone's guess. But I think any rational person would agree we are going to panic and we are all just waiting like deer frozen in the headlights.

It has been painful staying on the short side of this market recently, but it will pass. I wish it weren't so, but I am worried many are going to feel some really bad pain and they are going to say it was unforeseen. The Fed will be the first to use that excuse when it happens. Just watch!

Market comments for Oct. 13th

September Import and Export prices were disclosed a minute ago. Import prices fell -0.6% while Export prices went up +0.3%. In August Import prices were +0.5% while Export prices were up +0.3%. The Futures market has the Dow up about 80 points this morning even before the news. After the news the Dow futures dropped a bit and is now up 68 points.

I was looking at the charts and noticed that the S&P 500 still has room to go up. It is my guess that it could go as high as 1250 before the reversal of the trend comes in to play. It closed yesterday at 1169, so that could still yield a 7% gain form here. Then it will be downhill, as the final head and shoulder pattern of this indicator has been formed. So it appears the conditions are ripe for the final phase of this Bear market rally is about to end. Most likely the timing will be after the election but it could start to unfold even before that. There will be a 3 month period where even if the Democrats lose the majority in the House of Representatives that it would be in Republicans interest to drive the market down while Democrats are still in control. The Republicans could then show how they came in and saved the day in January, when they are sworn in to their new seats, replacing Democrats and Speaker Pelosi. The only problem with this picture is that when the big boys start to sell there is no one to buy the stocks because all will be doing the same thing.

The Dow is within 180 points of the 11,200 level where I said that I had thought the top of this rally was. This is close to the 52 week high of the Dow which went to 11,258 previously.

I got a chart last night from Weiss Research and it was very interesting as you can see below. The number of Bulls is now close to extreme which is often an indicator of a trend reversal is in order. We shall see if this plays out as predicted.

Also of significance today is that Apple stock, symbol AAPL, went over $300/share and in pre-market is at $301,08, up $2.54/share.

And on a special note I am thrilled, along with the people of Chile, for the successful rescuing of its Miners. God bless them all and I hope for them to manage the psychological aftermath now with al the attention they will get. Chile did this rescue right!

Market comments for Oct. 7th

Initial Jobless Claims were down 11,000 to 445K Claims for the week of Oct. 2nd. Expectations were for 450K. Continuing Claims were at 4.462 Million vs. an expectation of 4.450 Million. So the numbers were basically in line with what folks expected and basically unchanged for the past several months at this level of around 450K. This, while not good made the market Futures jump because it wasn't worse. That's a sad state of affairs isn't it.

Everyone waits now for tomorrow's Unemployment rate for SEPT. Will the number be the same and stay at 9.7% or will it tick up to 9.8%? Will this number drive the markets up or down? Give me a break. It isn't good for sure, and one I know would ask, "But is it Bad?" There is no real difference in the numbers, unless you are one of those unemployed. It is bad for America.

Two year notes hit a record low and 10 year Treasuries are now yielding 2.39%. The dollar continues to drop while many work today to make some dollars, even though their purchasing power is less today than yesterday. Gold hit another new high today at $1360/ounce.

European markets are up as are Dow and S&P Futures. We should cross over 11,000 today and are now closer to the 11,200 market top I had predicted back on Sept 21st. This rise in the market is confounding many, who don't understand the relationship of stock market assets in equities and the drop in the dollar and the rise in Gold. There is no real net change in the purchasing power, but it makes people feel better. That's the play right now. Hard assets like commodities are rising because no one wants to hold paper, except those in retirement who are finding it more difficult to survive.

I do eventually see Home prices will rise as these are also hard assets and the price of these assets will have to gain and prices rise before foreign buyers invade us to buy Commercial jewels across the U.S.

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.

May 28th market action going into long weekend (Final Update)

I have posted 2 charts going into Friday's market. Both are of the Dow and are of 2 month durations. I have drawn a Blue line to show you how I came up with a top of this latest rally at 10,500 to 10,600. One chart is of Candlestick patterns and as you can see now the close on WEdnesday was a reversal Hammer pattern indicating today should go up, which it did mightily gaining 284 points to close at 10,258. Investors may take some profit on Friday as we go into the long Memorial day weekend. But I do not see giving back all the gains made today. We only have about another 250 points before we head down again.

My TZA Puts gained today. I bought many of these two days ago for $0.90 each and today the Bid closed at $1.15 and the Ask at $1.25. Some shares sold today for $1.21, which is a paper gain of 34%.

When I sell these as we approach the comparable high for the Russell 2000, which should be around 680-700, I will also buy TZA Calls again. They should be cheaper than my last sale price of $2.25 each. Today they closed at $1.30 with a Bid at $1.15 and an Ask of $1.28. So they have dropped already to a reasonable level to buy them again, as this was a 42% drop.

The last chart I am posting below is the one I posted back last Friday when I said the market was going to drop and the pattern which was to develop. This should now close that prediction.

UPDATE: 6:00am PST.

Personal Income rose 0.4%, according to data released this morning. That is good news. The bad news is that Personal Spending dropped to 0.0%. The Consumer is saving their money, not spending it. This is confirmed by the Savings rate data which was at 3.6%. Futures point up this morning but it is going to be a back and forth struggle for this market going into the Memorial Day weekend.

Art Cashin of UBS Warburg stated on CNBC confirmed my prediction that the market is forming the right Shoulder of a Head and Shoulder pattern or what I have called the "W" pattern. He expects that if the market can hold most of yesterday's gains that in the next week or two we will go up. He too believes that we will not go back up to the highs, so my forecast of Dow 10.500-10,600 range might in fact be his thinking too. Stay tuned!

UPDATE: 6:55am PST
Data out on Chicago PMI (Purchasing Managers Index) for May was at 59.7 versus 63.8 in April. This is another piece of negative data. Dow, S&P 500 and Nasdaq are negative now. The University of Michigan Consumer Confidence went up to 73.6 in May from 72.2 in April .

UPDATE: 11:00am PST
I have posted below the Intraday chart of the Dow and have drawn Red lines to show the trend expected after each "W" pattern. The first "W" pattern, while going up initially after the "W" did finally come to a lower level. The signal now is a rise in the trend even though the Dow has gone lower at this point. Hopefully there will be a little rally to stop it from going much lower than down 150 points. The Vix has also gone up over 11% so far today to 33.30 as the market hits the ows of the day.

UPDATE: 1:20 pm PST
The market has closed and I have added the final Intraday chart of the Dow below, to prove my methods to you. Notice that even after the last Update above, it looked as though we were going lower than the 150 point drop, that I said the "W" pattern had pointed up and that we would go up. Well we did. As a matter of fact, even the folks on CNBC thought we might actually go up at the end of the day, until the market sold off again. But, it you were trading today, interpreting charts can give you the edge and, as I have shown, it is not difficult if I can do it.

Dow prediction for the next 2-3 years

I had some fun this morning and checked my psychic abilities and decided to share it with you all on where the Dow will be going over the next 2 years. I have also taken the liberty to do this as a chart of the Dow. I have drawn the 3 year downtrend line on the chart in red and used a "W" pattern to show where I see the correction going to 8,000 and then a reversal going back up in a more Bull market pattern through 2011.

The thing that makes this difficult and unscientific is that I am not using any data to predict this. I am using my intuition, which is not precise to say the least, but does see a "W" pattern in process right now. The first leg down from the high of Dow 14,000 went all the way down to 6,440. Then the leg up goes up to where we are now, about Dow 10,300. That is a move up from the bottom of 3860 points. Then use Fibonacci as a guide.

Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician Leonardo Fibonacci in the thirteenth century. retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

Using a Fibonacci retracement of 61.8% (because I do not see us going back and retesting the 6,440 level but do see us testing the 7,800-8,000 level again in the 1st quarter of 2010) that gets us to a retracement back to 8,000 on the Dow. That would give us a slanted "W" pattern with the second leg higher than the first and hopefully start a Bull market rally back up to 14,000 again.

This is all wishful conjecture but not totally mad. Let's assume that Christmas Retail Sales disappoints and the economy does show Consumers not spending as more continue to lose their jobs in Q1 of 2010 to an Unemployment rate of 11% or more. That would cause the stock market to pull back because the rise was based on a smooth recovery. That could get us back down to 9,000 and then add the Commercial Real Estate collapse that will come from poor retail sales. That will get us down to 7,800-8,000 level. The Government will provide another stimulus and it will atke some time to work, say about a year. That gets us to the beginning of 2012. This is just in time for the Presidential reelection of President Barack Obama. See there is a method to my madness. That will mark the end of the Bear Market.

I hope this is all clear to you now. I wouldn't bet the farm or even 1 dollar on my prediction. But I do believe something like this will occur and the Dow stock pattern will show a "W" pattern something like I have shown. The best prediction I have said to reiterate it is that we will not retest 6,440 level and that we will have a Bull Market Rally in 2 years. Check back, as this unfolds, to see. :)

Surprised by today's market action

Yes, I was surprised by the market action today. With so many layoffs and missed earnings by Caterpillar, I thought the market would take a step down. Volume was lighter than Fridays so we will know more by Wednesday, when the Fed completes its 2 days of meetings. Maybe many believe the bad news is already baked into this market, but I doubt it is. I am willing to be a believer with real data. I did not sell TNA nor SSO as I was looking to add to my positions on any drop. But it didn't happen today. I truly think we will all make at least 20-25% on this round trip for these ETF trades and I predict, again, within a 6 week period. That does not preclude a trip lower. If you are smart, buy on dips down and accumulate, because I think this next move up will be more like a sling shot, quick and far. Predicting the market direction means being in tune with the news and predicting outcomes there as well.

Setting the record straight on my recent stock market predictions

So here I am looking back at my recommendations going back to December. I wrote the following post on Jan. 5th as I was looking at my ETF Ultra Short Fund recommendation of SDS and TZA. Here is what I said:

"So I am taking the heat over my recommendation to buy the ETF Ultra Short SDS. Since I recommended the purchase the ETF around Dec. 6th the price was $70.50 (adjusted for the $11.50/share payout). Today the ETF closed at $65.70. Yes, it is down about 7%. But we are near the top of the range of the highs of the market in the Dow and SP500 as well as the Nasdaq and there has not been a clear breakout on strong volume. So I am still holding those shares. I have added to them several times since the beginning of December. The same is true for TZA, except it has lost more, because of its tripling effect. I had bought my shares at $53.50 and it closed today at $42.86. That's a paper loss of 20%. But I am willing to hold both of these 2 ETF's which Short the market because I fundamentally do not believe we are over the worst. There has not been a believable breakout, as I review the charts, and it is more like a creep up than a step up. You need to do what's right for you. I am doing what I believe will still be a profitable trade. Time will tell."

Well, I was looking at the current price of SDS and TZA and here's where they are now to close the loop on this recommendation. SDS is currently at $80/share and TZA hovering around $60. If you sold SDS now you would still have made over a 10% gain and same with TZA. I am choosing to continue to hold my shares because I think I can do better, but my commitment to try to get you at least 10% profit has been fulfilled today if you sold or are selling.

On Jan/ 7th I wrote:
We closed yesterday at 9015 on the Dow, 934.70 on the S&P500 and 1652 on the Nasdaq Composite. I expect us to go lower over the coming days. Expect the Dow to go down at least another 500 points this week, from where we are now (8777). I expect the S&P500 to go down below 880. The Dow has gone down to 8200 and the S&P has gone down to 840 currently.

I had said I thought MGM was overbought at $14/share recently and said it would go back down to $9.95/share and guess what? It has hit $9.95/share today.

So stick with me and bring your friends here. You can check out my predictions very easily, as I post often and my predictions and recommendations are Public record now. My style is different, but I share one thing in common with Jim Cramer of CNBC, I desire to help you preserve capital and grow back your nest egg. I get nothing out of this but the sheer pleasure of helping others. All the best!