"There are many who are living far below their possibilities because they are continually handing over their individualities to others. Do you want to be a power in the world? Then be yourself. Be true to the highest within your soul and then allow yourself to be governed by no customs or conventionalities or arbitrary man-made rules that are not founded on principle." ~ Ralph Waldo Trine, American Author
Extracted from the Nov 6 Market Update
We spoke of this pattern this pattern last week and stated that we would look at it in a more detail this week. The best way to do this is to illustrate the pattern graphically. What we discovered over a year ago after conducting a deep pattern analysis is that there is a relationship between these 3 indices (Dow utilities, Dow Transports and Dow Industrials) and this relationship is far superior to the one being pumped by the popular Dow theorists; in fact for the most part it goes against their reasoning. Our contention is that the Dow Utilities lead the way, followed by the transports and finally the industrials join the party. Looking at the above chart you can see that the Utilities were the first to put in a new high (green box) and they do so in late May 07. Next in line were the transports and they put their high in the middle of July and finally we had the Dow follow and they just put their highs last month (Oct 07).
Now according to this relationship the utilities should now lead the way and put in another new high instead of the transports confirming the current high in the Dow as some Dow theorists are crying about, then the Transports and the industrials should follow suite. For the record the main index to watch is the utilities; it is possible that the pattern could be slightly interrupted with the Dow industrials overtaking the transports. Note while both the transports and the utilities pulled back hard in the middle of August, only the utilities are trending higher as should be the case as they always lead. Note to that they tested their old highs (534-537) before pulling back; this area represents a zone of strong resistance so it's not going to be taken out on the first attempt. The key point though is that once again the utilities lead the way after correcting; based on this pattern the Transports should be the next to bottom and then rally to new highs. This pattern also suggests that the Dow should now be correcting and that's what it's currently doing after having put in a new high in Oct.
Now let's look at the utilities a bit closer; after putting in a new high in May they proceeded to correct and put in what appeared to be a bottom towards the end of July; this zone was then tested again in the 1st week of August and it held and thus one could have stated that a nice double bottom formation had just taken hold. However due to the massive sell off in the middle of august and the fear this sell off generated everything was dragged down the good, the bad and the ugly. In fact many commodities markets were limit down locked in other words the markets were halted because they had traded down to the maximum allowable levels for any given day. Off course this proved to be an incredible buying opportunity but for those who were caught in the moment they were busy throwing the baby out with the water. Thus the Utilities were dragged down even further and to the untrained eye it appeared that they had put in a new low; in reality that was not the case. They had only put in an intra day low on a closing basis they did not close below the two previous lows so what we had in effect was a massive triple bottom formation and after that they never looked back.
So based on this pattern its safe to assume the following:
- That unless something horribly surprising transpires the Utilities should the first ones to rally to new highs.
- The transports are now in a corrective mode but this mode is close to ending and they will most likely rally to new highs before the Dow
- The Dow which is the laggard of the 3 is now just correcting after putting in a new high. In other words it will most likely put in a bottom formation after the transports have bottomed. One of the factors that could speed up the bottom formation in the transports is if oil experiences a pull back. A lot of the current run in oil prices is due to the possibility of Turkey attacking Iraq and as soon as this threat is removed oil could mount a very nice correction which will help provide fuel for the transports.
- Once the utilities put in a new high it's virtually a given that the Dow and the transports will both go on to put in a new highs.
We believe that there is a very good chance that the Dow could rally to put in what will amount to a true new all time high (all the highs so far have been illusory in nature as the low dollar has not be taken into consideration) before embarking on a rather serious correction. This correction could drag the Dow several thousand points. If we had to guess now we would say that this future correction could drag the Dow all the way down to the 9600-10200 ranges before stabilising. We will look at this deeply when the time is right for now it's just a guess as it's not something that has going to happen tomorrow.
Looking at other market factors
None of our indicators have flashed any massive sell signals (both Technical and Psychological) yet and thus we have to conclude that the outlook is still bullish in the intermediate time frames. On the short term time frames we are expecting the markets to pull back even more and now that the Dow has broken past the 13350 level we suspect there is a very strong chance that it will test the 13000 mark. If this is broken then a re test of the lows (12550-12600) is a strong possibility.
We spotted one more piece of juicy information this week. Last time the market tanked we stated that we would need several selling climaxes and we ended up getting over 4. We stated that each selling climax would draw us closer to a bottom and usher in a massive rally and that argument proved to be true. The interesting part is that in less than 5 trading days we have witnessed two selling climaxes. One occurred last Thursday where the down volume accounted for over 95% of the total volume traded (this is a hug number usually it hardly passes the 93% mark) and today we had another selling climax. And would you believe it that today's figure came in at 94.1%.
One other negative though is that last weeks figures revealed that speculation was still high though we suspect after this week has passed these figures will drop as speculators rapidly close their positions. Now what would change our outlook from bullish to incredibly bullish would be if our smart money indicator which has not generated a buy signal in over 2 years finally issues one or at the very least flashes a huge positive divergence signal. If this were to occur we would advice speculators to aggressively start piling up on call options. For the record our smart money indicator is very close to issuing a buy/positive divergence signal but we are not quite there yet.
The new is terrible, the outlook is gloomy and the doomsayers are having a field day. Once again the financial world is about to end at least as far as they are concerned and the masses are slowly starting to stampede for the exit which always happens to lead to the edge of steep cliff. Note however that despite all this terrible news and bear in mind this news is not new (bankers and mortgage players knew of the trouble that was coming almost 2 years ago), the markets are still trading significantly higher than they were trading 2 years ago. Let's conduct a simple test; go back two years look at what level the Dow was trading.
All charts were provided courtesy of www.prophetfinance.com
If you do that you will see that the Dow was trading at 10500 and with today's close it's at 13300. Now in that time the news has only gotten worse, the dollar has been hammered, housing market has been smashed, over 179 private mortgage firms have gone bankrupt, thousands have lost their jobs both in the financial, housing and construction industry and the dirty list goes on and on. Logic would then suggest that the markets should have crashed all the way to hell but viola they have not; instead these very naughty and unpredictable markets have done the unthinkable. They rallied in the face of extraordinarily bad news. This brings the following saying to mind "markets climb a wall of worry and fall down a cliff of joy".
To conclude today's action suggests that the Dow could trade to the 13000 level and if this level is taken out then a test of the lows is virtually assured. If this should transpire traders should add to their positions or open new ones from the stocks listed in our portfolios. When the time is right we will issue another set of higher risk option plays on the various indices.
To summarise we are waiting for a new confirmation from the Utilities and also from our various tools both technical and psychological. As of right now not one of our tools has flashed a major sell so it follows that they should start to flash a series of buys relatively soon and when they do we will be ready and waiting to deploy additional funds into the market.
"I envy paranoids; they actually feel people are paying attention to them." ~ Susan Sontag 1933-, American Essayist