Wednesday, February 4, 2009

Dow Jones Industrial Average Eyeing 4,700 Points ?

Article from Barton's Asian Stock Market Charts

The world's markets are performing quite homogenously: all display good support at the current level which offers hope for bottoming, failing which, we can expect to see markets go a lot lower - as much as another forty or fifty percent from recent lows. Starting with the Dow, there is a fair chance that the index is bottoming now with a low in the 7,700 level. As I have said before, such a bottom would require a few more months, or quarters, to complete.

Bear in mind that the Dow has pulled back to its 10-year low. If you look at the regression line on the 80 year Dow chart you will see that the 10-year low does not correspond to the lowest support on that chart (3rd chart on the US markets page).

The support on that chart would be at around 4,700. That support is formed by the plunge in 1931 and the recession of 1982. If we are in the worst financial crisis since The Great Depression, should we not expect the Dow to fall as far from its 80 year geometric average as it did in 1931 and 1982? Answer: Maybe. (I am sceptical of hyperbole and would prefer to wait for stronger technical signals.)

If the Dow makes a new low, the chances of 4,700 become greater. First, a new low will amount to a breakout from a huge double top. We have already seen Bank of America and Citigroup break out of analogous megatops and they have both passed target. GE is now midway to target of 8 of a smilar megatop. If the Dow breaks out of such a top, chances are fair that it will go to target.

But note that in the seventies it broke a similar top only to turn back and bottom along the neckline. Megatops, by reason of their infrequency are uncharted territory. Even ordinary tops of a few months or a few years formation can fail. But as with all of this hocus pocus analysis, it is worth keeping an eye on the scenarios. Dow 4,700 would become a credible scenario if a new low is made.

European markets are making similar top patterns to those of the US markets. The FTSE, for example, would detonate if it fell below 2,900.

Asian markets are all in much of the same boat at the moment. They could all be bottoming at the current level, as could all global markets. (More time and more volume would be needed.) The Hang Seng, for example, has good support at 11,000. But if this support fails, 6,500 is the next good support. The PE for the market is, however, at around 7 (see the PE chart on the Hongkong page).

This level corresponds with the record low for the Hang Seng index set in 1998. Unless earnings were to fall by 40% over the next year or so, a fall to 6,500 is unlikely from a fundamental perspective. But who knows what the manic depressive markets will do? Again, keep in mind the scenario if a new low occurs.

One thing we can say is that if Asian markets are bottoming at the current level, the current crisis would see those markets a lot higher than they were when they bottomed in 1998. Hongkong, Singapore, Thailand, Korea, Malaysia, India and Indonesia are all resting on long term log-scale supports. (Japan and Taiwan are still in the sand trap.)

If these markets bottom at their current levels, the crisis would be seen, over the long term, as a mere pullback to support on their long term ascending trajectories. A nice note to finish on.

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