Tuesday, April 10, 2007
Dow, this is Earth calling
The last two months of trading has been noted by turmoil. Absolute fear in the sub-prime market. A sneeze in China sent US securities for a spin. The carry trade was ruined! It could have been the end.
But it wasn’t.
We’re coming back to earth. The Dow was an extreme out-performer in 2006 and I think 2007 will be the year the Dow gets back to its bearings. I hate to be a downer, but 11400 might not be out of range.
The chart below may help you understand where I am coming from. Prior to the amazing year we experienced last year, the Dow followed a moderate advancement upward in a near perfect channel. In 2006 we saw a touch of the top of the channel then a notable drop to the bottom of the channel where it would later double touch and send the index out of the channel all together. Now I believe the index is headed back into its previous path.
As you can see, the index had a perfectly carved path. In 2006 with the May sell off, the index hit a low for the year and then later touched the same low again. I think it was this double bottom that sent us to some of the best 6 months in the last half of the year. As a technical analyst, anything I see outside of the “norm” is bogus. The part of the graph outside of the channel is unjustified territory and unsafe ground for your investment dollars. The volatility inside the channel is nothing compared to what could happen outside.
Ideally, the Dow would come to rest again at the bottom of the trend only to continue in its usual path. I hate to say that 2007 is going to be a consolidation year and be a drag but I think it is actually what is best for today’s market. A consolidation to 11400 would be best for the market to continue moving forward. This would leave 2008 and onward to bring financial prosperity in the markets. I think the change of presidency could also have an effect.
More evidence that suggests a consolidation is the breakdown of the smaller trend I have outlined. The 500 point drop day cuts clear through that trend. When there is a huge movement through a trend, the movement confirms the trend was recognized as support/resistance.
Don’t go crazy over all the sub-prime news, let that storm blow by. If we experience some kind of drop this year in the Dow, its not the reasons you hear on TV, its just a consolidation or rebuilding year.