Well, Hello Fractals.... Dow 3-Year Chart Now and Then (2008, 2009)

So the 2nd quarter GDP comes in lower than expected, but the obligatory dive of the stock market at the open was quickly eradicated. Dow Jones Industrial Average is down only about 10 points, instead of 100 points. For now, at least (9:30 AM PST).

Nothing to trade here, so I started my game of pattern recognition in the 3-year Dow daily chart. And I'm seeing something interesting. I'm not claiming it definitely, but I'm just sharing.

I see a pattern from October 2008 to June 2009 being repeated, albeit on a smaller scale and shorter time frame: diminution.


We know what happened after April 2009. It seems like QE2 in some form is all but guaranteed. Are we going to have another melt-up on low volume, going into the November election?

But you may also notice that the current pattern looks very similar to the pattern right after the market top, from December 2007 to April 2008. We know what happened after that. The stock market went up in April and May, making TA people giddy with the idea that the chart is forming a big "cup and handle" pattern and that the upside would be so great when that pattern breaks to the upside. And then June came, and it was all downhill from there...


So, take your pick. Or don't pick at all and join people who have been yanking their money from the equity mutual funds.

The Cardinal Climax is coming. Just so you know.

US Market in May 2010 in Longer Perspective

The Dow Jones Industrial Average registered the biggest monthly drop since the market turned in March 2009. It's hard to assess the magnitude or the significance (if any, in this age of algo bots) by just looking at daily or weekly chart.

So here you go, the Dow 10-year monthly chart:



It was indeed a nasty big red candle that was formed in May. Not that the market bulls want to hear, but the drop of this magnitude doesn't seem to happen in an uptrending bull market.

After the dot-com bust, which Dow Jones didn't quite suffer, the market finally bottomed in 2003. If you follow the candle formation after 2003, both up-months and down-months had smallish candles, and the movement was gradual until the final run to the top, which started in the middle of 2006.

In contrast, at market tops (in 2000 and 2007), the candles get bigger - bigger bodies and/or bigger shadows. The candle that formed in May fits the pattern.

Also notice the index hit the 40-SMA in April and May, and couldn't stay above it. The index stayed above the moving average almost the entire run from October 2003 to June 2008, when it decisively broke below.

Slow stochastics set at 120 has yet to reach above 60 in the most recent run since March 2009. MACD is still in negative territory. (Thus the argument by some TA people, most notably Elliott Wave people, that this hasn't been a secular bull market but a counter-trend rally within the bear market.)

One month doesn't make a trend of course, but looking at the sheer size of the May candle, "Sell in May and go away" may prove to be the right strategy, again.

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.