Where is the Dow heading?

Today we look at the Dow over a period of 2 to 5 years to get a sense where we are and what we must consider as we try and manage our investments. We are at a critical point where we are either going to have a breakout to the upside or we will have a breakdown to the down side as illustrated in the charts below. First let's look at the 2 year chart for looking at the current top of resistance. It is that highest blue horizontal line.
In the chart above, the bottom red line marks a short term support line. Breaking below this line doesn't mean we have a significant breakdown, but it does mean we need to be careful. In the 5 year chart below, you will see where the next real support line is and this one we must stay above or we may go down and retest the lows again.

Much going on this week in Europe and while we begin Earnings season with Alcoa reporting its earnings, Europe may take center stage over any news here.

Market comments for Aug. 19th, 2011: Options Expiration for August

It looks like another leg down at the open today as European markets are down 1-2% at this hour. Important day today as it is Options Expiration for August. Volume today should exceed yesterday's high volume. No other financial news here to announce this morning with the exception of J.P. Morgan's prediction lower growth of GDP in the 4th quarter of 2011 and first quarter of 2012. To quote Bloomberg news: "The U.S. economy may expand less than previously thought in the next two quarters as consumer sentiment drops and the housing market fails to gain momentum, JPMorgan Chase & Co. wrote in a report.

Gross domestic product will grow 1 percent in the fourth quarter rather than the 2.5 percent previously forecast and 0.5 percent in the first quarter of 2012 instead of 1.5 percent, Michael Feroli, JPMorgan’s chief U.S. economist in New York, said in an e-mailed note to clients today."

I have included 4 charts this morning. Three of these 3 month charts are as follows: One of the Dow, one of the S&P 500, one of the German DAX Index. The other chart is of Germany's DAX Index over a 5 year period. In this last chart I have drawn several support levels which are now possible given the recent downward trend. This chart is very similar to our Dow chart for the same period, which I did not include. But the lows happened at the same time. Our low hit 6,400 before it finally turned up again. I believe we will ultimately have to test that level on the Dow, because the economic news looking forward does not look bright for all of 2012, not only for the US but for Germany as well and much of Europe. I wish I could tell you something else, but I don't believe a different scenario will occur. Let's just get through today and see where we are. next week, but at the first signs of a further new low in the Dow or S&P, consider the probability higher for this major decline to continue for the foreseeable future.




Come back over the weekend so I can show you some charts on the Dow/Gold ratio and where Gold may be headed. And also some data on the Gold/Silver Index.

Market comments for Aug. 10th, 2011 (UPDATE)

Yesterday's market did rise as a result of the Fed's announcement to maintain low interest rates until 2013. Great, just what we need, more people borrowing cheap money with most likely no hope of paying it back because they don't have a job.

The Dow closed above the 11,000 level to finish at 11,239 for a 439 point gain. It seems to me now that the 11,000 level becomes now support level and 11,500 now becomes the resistance level.

Looking at the chart below, you can see that the move up was impressive if it wasn't that we've had so many large declines lately. Still, an impressive move nonetheless. I am expecting a move up to test the 11,500 level, then a pullback to test 11,000 again. Looks like we will be testing 11,000 support first based on a slightly negative Futures level. You see the news about low interest rates for as far as one can think right was the same as having very low interest rates these past several years. It didn't seem to do much for the economy, so I am doubtful this will have much of an effect on the market. It is still a very slow to negligible recovery. This market sold off for different reasons and those reasons are still relevant, hence the feeling we are still going to go down in these markets worldwide.

I am going to be plenty busy the next few days but I will try to post when I can. Thursday's Initial Jobless Claims is an important data point on Thursday morning.

UODATE: 5:45am PST

The Dow Futures are down this morning at -152, the S&P is at -17 and the Nasdaq is at -37 with all in a negative trend and deteriorating by the moment. Oil is up almost $3/barrel. Jim Cramer said this morning on CNBC that the "machines" are moving markets too rapidly for the average trader to participate. The "machines" he is talking about are the super fast computers which use algorithms to do its trading in the blink of an eye. This type of trading has been called High Frequency trading. Before the average trader can put an order in to Buy or Sell, these super computers have made thousands of trades. They have a definite significant advantage, as the Gatling Gun does over the Bow and Arrow.

Dow chart and market prediction. (UPDATE 2)

I have had many readers ask me where is the market headed? Of course, I have no clue, nor does anyone else, as it is all a guess. The more correct answer is that it depends how much manipulation various governments want to use in this crisis. In my humble view, most government leaders are risk averse. They don't want to go it alone, so they try coordinating actions with other world leaders. This crisis hasn't yet allowed the space for this to occur, but I expect some meeting will be held so that various Finance ministers can coordinate an action to calm nervous investors worldwide. But in the meantime, we could have a continued free fall.

In early trading this morning, it is evident this is happening in Europe again today. After the CAC, DAX and FTSE were all down over 3% yesterday, they are down again today another 2% roughly. All eyes are now firmly in place watching us and what the numbers are for our Unemployment rate for July, which comes out in about 30 minutes, as I write this. (Suggest you read yesterday's previous post to see what various numbers should do to the markets this morning) The Dow Futures were down about 50 at about 4:00am PST but have adjusted to now being down only 15 points in anticipation of about a 9.2% Unemployment number coming out in a half hour.

The chart below is of the Dow for 10 years. I have taken the liberty to draw a number of Support levels which show when we go through one, which level is next. You see it is possible in a world where fear becomes to take hold, we could go down and retest the 6,400 level on the Dow which was reached in 2008. I won't go into any theory why this level is important, but a short version is that this level was never retested and many of us thought back then that we could go much lower to say 4,000 on the Dow. So for now, if you save this chart, you should know when we turn back up as one of these levels would hold and the bounce back would come from that point and the previous support level would become resistance on the way back up.

Come back later during the day today as I may update this post several times, depending on today's market action. Thanks for visiting now.

UPDATE #1: 5:35am PST
The Unemployment rate for July came in unexpectedly at 9.1%. Revisions were made to previous months as well, showing more job creation than expected. While very good news for today and the market, longer term the jobs created were relatively meager in the scheme of things. Our economy needs more than 117,000 Non Farm Payroll jobs created. July's job growth came in Healthcare. The Private sector added 154,000 jobs for July. The average work week remained the same at 34.3 hours/week. Average hourly earnings were up 0.4%. The Dow Futures were up 125 points immediately after the news but have pulled back to being up 75 now.

UPDATE: #2 11:05am PST
Well, there have been wild swings all morning, some based on the Unemployment report and some from the problems with Italy's debt and then a rumor floated by the news media, that the European Central Bank will be buying debt directly. What to make of this news is that it is some rumor, some fact, because the ECB has said they are considering this action.

The thing I would pay attention to is the close today on the Dow. Remember yesterday we broke below the 11,500 support level. So it is important to see where we close. Do we have a rally and close over 11,500 on convincing volume or do we close below that level. Right now, there is a battle going on between the Bears and the Bulls. Longer term, I believe the Bears will win this battle and the markets will go down significantly.

One month chart and comments on the Dow

As you can see from the chart below, the Dow reached 10,451 today as a high, which coincidentally is just under the 200 day Moving Average. This has proven to be a significant resistance level for the Dow.

Below, the one month chart, of the S&P 500, shows that the S&P has lagged the Dow in approaching its 200 day Moving Average. So while today is a feel good day for the Bulls, they have yet to go over this important Resistance level. Overall, we remain in a tight range but the swings cause emotional trading, rather than measured trading.

Market update June 15th

Lots to talk about today. The Dow has rallied again this morning but so far has not been able to get over the previous high of a few days ago of 10,328 and has made several attempts to climb high and penetrate above R2 resistance level of 10,377. I do not see that happening.

This week is June Options expiration on Friday. To be in the money, they want the S&P 500 to stay in the money above the 1100 level. It has bouncing above and below that for the past 2 days. It is currently at 1103.

Important data coming out tomorrow, Wednesday, on PPI, Core PPI, Industrial Production and Housing Starts. Thursday has Jobless Claims, Consumer Price Index and Core CPI.

The Intraday Dow chart does not reveal much yet but when it does I will post an Update here.

From Europe this morning an interesting bit of information. The Mannheim-based ZEW Center for European Economic research said its index of investor and analyst expectations, which aims to predict developments six months ahead, slumped to 28.7 from 45.8 in May. That compares to economists forecast for a drop to 42. This sounds like a slowdown is coming there and we in the US are expecting "slower growth" in the 3rd and 4th quarters so to me we could go back into the recession.

UPDATE 10:30am PST

As you can see in the chart above, we went higher than the level I commented on earlier today but have not gone over R@ at 10,378 level. Ther eis a "W" pattern as shown above and it is slanted slightly down. So while we are higher right now, we should go below this right leg of the W pattern.

Update 12:15pm

Well, take a look at the "W" pattern I posted above and compare it to the underlined one in red in the previous update. It looks to me that the slant was changed and now there isn't one. No wonder the Dow rallied up. I didn't do any trading during the time so it's not a problem, but could have been if I had.

The Dow: Where are we going over the next few months?

I added more information to the Chart of the Dow which should give you a more complete view of where I see the Index going and what are the barriers of resistance that should prevent the Dow moving up much more any time soon. You can click on the chart to enlarge it and get a better view of it. The 2 dotted red lines will show you the range I believe the Dow will stay between in the next few months. You can see from the 2 Blue lines that the range has tightened over the past 2 moths and we are now at the resistance level of 10,000. The low end of the range here is 7,800 and it is not unimaginable that the Dow could reverse and go as low as 7,800 again, especially with earnings about to be issued for many companies over the next few weeks. I expect earnings to be good but not stellar as the bar was set so low by analysts. They will make their earnings BUT the top line revenues will disappoint. And that will validate the Consumer has all but stopped spending on unnecessary items. Christmas will be more uneventful this year than it was last year as many more are now unemployed. Oh, speaking of Unemployment, the numbers for September will show a higher Unemployment rate yet again and may go over 10% this time. Professor John Stiglitz, economist from Columbia University, has recently said (see Video clip on Bloomberg) unless we have greater than 3.5% GDP we will continue at least a 10% Unemployment rate for 2 years or longer. He believes many will not even file for Unemployment benefits as benefits will run out.