A Very Very Long-Term Dow Chart You Don't Want To See

I was writing a new post, reviewing the movement of Dow Jones Industrial Average for the week and marking up the chart with Fibonacci retracements and trend lines. Then it all started to look extremely familiar, like "identical" familiar. IT WAS INDEED NEAR IDENTICAL to the chart analysis I did on May 17, nearly two weeks ago, and this was the chart.

Mercury Retrograde is finally ending, and the stock market, despite sizeable ups and downs, ended the month and Merc Retrograde where it had started. Today's close was almost the same as May 11 opening, the first week of the Retrograde (see the numbers in my other blog).

So, ditch that post, and let's take a look at a very, very long-term chart for a change. This is a chart of Dow from October 1928 to April 2009, in log scale. This way, we can really appreciate the magnitude of the market crash from October 1929 to July 1932, during which the index lost 89%.

The thin light blue lines in the graph are drawn, first by connecting the market top in 1929 and the top of 2000, then by drawing the parallel line to that from the market bottom in 1932. Then the line is drawn in the middle, between these two outlying lines. (They are not, therefore, drawn as linear regression lines.)

Several interesting observations can be made.

After the recovery (more or less) from the market crash of 1929-1932, the index pretty much hugged the middle line in 3 shallow waves, with each lasting 15 to 20 years.

Then around 1994, instead of gently descending toward the middle line, as in the past, the index started to accelerate upward, and completely abandoned the middle line for the next 12 years.

The index has fallen from the top in October 2007, and at one point it was down 55% from the peak. However, if you look at the chart, we are still nowhere near the middle line.

If it is to touch the middle line, Dow will be somewhere in 5,000. If it is to correct as much as the 1929-1932 crash did, I don't want to even read the number.

This is by no means saying that's what is going to happen. The index doesn't even need to come down to the middle line, and somehow it will resume its upward march. The chart from 1994 onward may create a totally new pattern not bound by long-term trend.

Lastly, it is noteworthy that this "kink" in the chart around 1994-1995 coincides with the start of easy money/credit policy and the start of the housing bubble.