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Amateur Investors Weekend Market Analysis

http://www.amateur-investor.net/Weekend_Market_Analysis_Dec_25_10.htm

Here is what I see as being the three most likely outcomes for the Dow in the years ahead. The most bearish scenario is that the entire move from the October 2007 Top 2009 low is evolving into a corrective "ABC" type Zig Zag affair. Wave A bottomed at 6470 in March of 2009 which was composed of 5 Waves. Meanwhile the rally from the March 2009 low is Wave B which would then be followed by an elongated Wave C. Wave C would likely drop slightly below the March 2009 low while finding support along the trend line (black line) connecting the October 2002 and March 2009 lows near the 6000 level at some point by 2014 or 2015. Keep in mind this would likely be the worst case scenario.



Meanwhile an alternative bearish scenario would be the Dow is forming a Head and Shoulders Top pattern much like occurred in the 1970's. However notice back in the late 1970's after forming the Head and Shoulders Top pattern the Dow never retested its Neckline and held support at its 61.8% Retracement Level (point D). Furthermore also notice the Dow traded in a choppy consolidation pattern after forming the 2nd Shoulder for nearly 7 years before breaking out in 1983.



Here is a current chart of the Dow with the potential Head and Shoulders Top pattern. Now if the Dow were to follow the 1970's pattern and peak around 11700 then a 61.8% Retracement from the March 2009 low of 6470 to 11700 would be around 8500. Also we would see a choppy consolidation pattern for the next 7 years between 11700 and 8500 which would take us through 2017.



Meanwhile a bullish scenario would be the Dow is developing a Broadening Top/Megaphone pattern like occurred in the S&P 500 from the mid 1960's through the mid 1970's. Also notice the 5th Wave up was an "abc" affair and once completed after rallying 74% was followed by a 48% sell off.



If the Dow is developing this pattern then it's about half way through its final 5th Wave which would probably complete around 2013 as the final Wave peaks around 15000 as a possible "abc" Zig Zag pattern much like we saw in the early to mid 1970's with the S&P 500. Keep in mind once the final 5th Wave completes this would then be followed by a large sell off and a likely test of the lower trend line below 6000 by 2015 (point F).



Finally the key to which of the above mentioned patterns is developing will depend on the next correction in the Dow. Right now the rally from the July low of 9614 certainly looks like a 5 Wave pattern which is nearing completion. Thus it looks like the Dow is due for a correction as we move into 2011 of at least 10%.

If we are seeing pattern 1 or 2 then the Dow will eventually drop below the July low of 9614. Meanwhile if pattern 3 is going to occur then the Dow really shouldn't drop below the 10400 area which would be at the 61.8% Retracement Level if the Dow peaks just below the 11700 next week.