(click on chart to enlarge)
CHART AU COURANT: With every pundit and TV station and newspaper asking if the markets have reached their lows, I remind everyone of some numbers I posted last week, which are still valid below in red. Use the chart for reference while reading. The area between the two red lines in the chart is the expected rally point, and exit area of the relief rally. Whether it comes before or after the possible test of the 6000's is of little consequence, because either way, it will be the last chance to avoid the following test of the 5000's. Don't get hooked on the Dow numbers, just look at the picture to see that compared to the 14,200 peak and move to the recent 7,800 (a 6,400 slaughter of your wealth), the move from the 10,000 to 11,000 area down to the 5,000's is completely reasonable to imagine. If you can imagine it, you can do the math on your wealth. If your portfolio is now 40% of what is was a year ago, and it recovers to be only down 20% by early 2009, take this early 2009 wealth number and cut it in half to see a value you will have to live with if this scenario plays out. The upward pointing white line that broke last June, is the 34 year trendline that began when the old bull market was born. The downward pointing white line is the new trendline that began last June. The blue vectors at the lower right are my "path of pain" the our forecasting model is suggesting. Yes, the same forecasting model that has been giving us the pinpoint bullseyes on entry and exit points captured in these postings.
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Last week, on Oct. 9, I said: With the Dow off 40% since its high a year ago, there should soon (days/weeks, not months) be a rally back up toward the underside of the break down level of 10,300-11,000. This rally should begin sometime around the election +/- 10 days. In the meantime, there is likely a sharp, failing rally that begins with the next few hours/days that might reach into the 9800 area +/- 300. Prior to the election however, there is still better than 50/50 odds of 7800-8100 being tested first though, with 7100-7600 a respectable possibility. Any panic under 7000 should be greeted with short term joy and bought strongly. Use the stretch of the rubberband to your advantage.
There is so much emotion in the market these days that the moves that I am forecasting in the next few days to weeks are happening in the following hours to days. Within a day of posting the section above in red, the Dow screamed 1800 points. This led to another two day fall of 1600 points. Finally, another rally into yesterday's close of 750 points. Over 4000 points of travel in a week. That alone used to take years, but just happened in a week. It is prima facie evidence that panic abounds. The good news about panic is that it doesn't last long, so we are nearing the end of the 1st of at least 2 great panics of this Bear Market. The levels above in red should be used to guage your near-term risk/reward into the election. In fact, the election could punctuate the panic and create the relief rally (in between the soon-ending 1st panic, and the upcoming, in 2009, much larger 2nd panic) that could pop Dow prices back up towards 10,300 to 11,000...maybe a bit higher. However, the piper hasn't been fully paid to the downside yet, as leverage, speculation, and greed are still rampant. The proof of this is the fact that the crowd is still looking for the rally to "break even" from year-a-go values, rather than looking for a prudent higher level to exit to protect their wealth. That distinction will be the bane of their existence in the coming years with only a fraction of their former net worths.
For what it's worth,
Ken
