April 13, 2007

LET'S PUT UP THE CHART OF THE 1946 DOW INDUSTRIALS BULL CAMPAIGN

Today I'd like to revisit something we've been viewing the past few months. My forecast has indicates this current US stock market will follow the "pattern of trend" similar to the 1942 to 1946 market. You can see how this trend started with a fast move up. Then trended upward at a slower pace during the mid-part of the trend and ended with a fast or exhaustive style of trend. There was a 21 day break before the final launch into the final high. That final run was 90 calendar days and that is what is now occurring. Before we leave this picture note how the top consisted of a new high, a fall below that high to bring in some shorts and a final thrust that included the classic short covering rally. Followed by a collapse in prices.

NOW LET'S LOOK AT OUR CURRENT MARKET - WEEKLY CHART

You can see the "pattern of trending" is exactly the same. The 1946 correction following the exhaustion trend was 21 calendar days and our current experience was 19 calendar days. The last rally in 1946 was 90 calendar days and is a typical time period for a final rally in a bull campaign. That would indicate June 12th as the final high and July 27 as a lower high and the start of a fast move down. The last half of this current 90 day block in time should be a struggle and allow for a distribution as occurred in 1946 and most tops. Also the 1946 bull campaign lasted 4 years and 32 calendar days. Our current bull campaign is 4 years and 31 calendar days.

When I gave this forecast I indicated there was one time period that could get in the way of that forecast. If the index showed the last move up as a 90 day block in time and that was followed by a lower high at 135 calendar days from that low and that has occurred.

LET'S LOOK AT THE DAILY CHART (doesn't contain Thursday's data)

The significance of this pattern in time is it is followed by a fast move down or crash. I don't believe this applies here because the move up since the March low was very strong and has a strong retracement up to 7/8 of the move down. Also, there were extremes hit in upside/downside volume and other technical readings at the low and also within the thrust up that present strong probability of seeing the index higher two to three months after those readings. So I don't believe this time period or a crash scenario applies here. BUT I would at least be aware if this index starts to show signs of trending down rather than just a counter trend down. So even though I laid this out as a possible time window for a fast move down I'm still staying with the forecast of running out to June 12 and lower high on July 27 and then the crash or fast trend down.

Next Wednesday on Power Lunch I'll offer a forecast for the FTSE.