...and if that wasn't bearish enough; an excerpt from Taipans daily letter--
***Since we seem to be running a theme here of days gone by, we may as well speak about the Dow. I’ve been watching the blue chips for weeks. And I’m calling for a drop on the Dow that could overshadow any strides its made in the past few years. In fact, Bryan Bottarelli and I just had WaveStrength Traders sell their DIA puts for a gain of 14%. And I’m sure we’ll do it again in the coming weeks. (The DIA is a proxy for the Dow on which you can buy options based on the underlying market’s movement.)
Now I’m going to get a little technical here, but I’ll try not to lose you. The Dow is currently trading at 10,551.42, almost smack dab in the middle of the 0% and 23.6% support lines on a Fibonacci retracement grid derived from the low on October 10, 2002.
On the daily chart, you can see that most trading from the beginning of 2004 to today occurs right in the middle of that area. Now, to make it a bit more complicated: a Fibonacci retracement grid from the most recent low of 9,708.40 on October 25, 2004, to the high of 10,984.46 shows that today’s current price is dropping upon the node made by the 200-day moving average and the short-term 38.2% Fibonacci grid.
What does this tell you? Well, considering that the 38.2% Fibonacci grid (at approximately 10,508.24) is one of the two strongest support lines, it could mean that the blue chips are in for a pop. But all theory aside, you’ll see from the daily chart that while the Dow has attempted to maintain support at that line since 2004, it has failed every time. The most recent instance of this was the two-day 289.25-point drop on June 23 and 24, which brought it below the 200-day MA. And before that, the Dow dropped through the same line and past the 200-day in a three-day 419.94-point bloodbath between April 13 and April 15.
Some will retort that the most recent rounded top is higher than that of June, signaling a continued bull market. But this same formation occurred before the high of 10,984.46 in March 2005, and the Dow dropped down to 10,000 a month later. Technically, I think we have a head-and-shoulders pattern coming up. I’m calling the most recent rounded top the head, and the one before that the left shoulder. To complete the neckline of the formation, we’ll see a drop down to 10,213.14 in the next month or so, and then a final rally up to 10,600 before the major drop, which could bring the Dow down to 9,700 in the next six months.
***I know that long-term analysis isn’t very good for current trading. So let’s talk about what you can expect tomorrow. Since we’re expecting a Fed hike, I went back to the last four times the Fed hiked rates this year to see if I could glean anything from the chart for tomorrow’s market action. The Fed raised rates on February 2, March 22, May 3 and June 30. On both June 30 and March 22, the Dow dropped almost 100 points. On May 3 there was a slight doji, where the open and close are pretty much the same. And on February 2 the Dow was slightly up.
I expect another 100-point drop tomorrow. From a current price of 10,528.58 we should see the Dow drop below its 200-day MA tomorrow, right around 10,430, between the short-term 38.2% and 50% Fibonacci retracements.
Of course, you can tell me that oil prices are going to continue to rise, US crude is going to drive past today’s high of US$63.30 tomorrow, or the next day, and that’s why the market’s dropping. You can tell me that energy companies are sucking all of the money out of the major market and into the sector.
My only response is that you might want to invest in some Dow puts for the long run. Because as far as I can tell, you can manipulate, spin, change, cover and erase the good or bad news, but you can’t take the truth out of the technicals.
You heard it here first: 100-point drop tomorrow and Dow 9,700 by February 2006.
Cordially,
Ann Sosnowski
Senior Editor, WaveStrength Analysis
AI
