Replies to post #9634 on Sector Investing

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Amateur Investors End of Year Stock Market Analysis (12/30/11)

http://www.amateur-investor.net/Weekend_Market_Analysis_Dec_30_2011.htm

As I have mentioned in the past the Dow has never had a negative year prior to a Presidential Election Year since World War II and this year was no exception as it closed up by 5.5%. However this is the first time there have been two consecutive occurrences in which the Dow has returned less than 10%.

 
 Year 	Return 
 1943 	13.8 
 1947 	2.3 
 1951 	14.4 
 1955 	20.8 
 1959 	16.4 
 1963 	17.0 
 1967 	15.2 
 1971 	6.1 
 1975 	38.3 
 1979 	4.2 
 1983 	15.8 
 1987 	2.3 
 1991 	20.3 
 1995 	33.5 
 1999 	25.2 
 2003 	25.3 
 2007 	6.4 
 2011 	5.5

Naturally the question is what does the market do now? From a Wave Analysis perspective there was clearly a 5 wave move down from the 1371 high in the S&P 500 which bottomed at 1075. So either this was Wave 1 of a larger 5 Wave drop or "A" of a less severe "ABC" type correction.

If this initial move down was Wave 1 of a large 5 Wave affair then the current rally would be a Wave 2 of 5 bounce. Naturally once the Wave 2 of 5 bounce ends then Wave 3 of 5 would develop followed by Waves 4 and 5 to complete the pattern at some point in 2013. Thus this would eventually lead to a retest of the prior March 2009 low as the entire move from the late 2007 would evolve into a large "ABC" type corrective wave.



Furthermore if we look at a historical chart of the S&P Composite using a log scale notice the longer term upward trend line (blue line) and the trend line connecting the 2002 and 2009 lows (green line) coincide in the mid 600's. Also notice the 61.8% Retrace from the mid 1970's low to the late 2007 high also resides in the mid 600's as well so this area is clearly a major long term support zone.



Meanwhile an alternative count would be that the move down from 1371 is evolving into a simple "ABC" correction such that "A" bottomed at 1075 while the current move up is "B". Once "B" ends then "C" would occur with a drop back to the 1000 to 936 range. The 1000 area is near the 50% Retrace from 667 to 1371 and is where the S&P 500 held support at in July of 2010 (D) while 936 is the 61.8% Retrace from 667 to 1371. Naturally if this pattern were to pan out then the previous low made in March of 2009 would never be retested.



A similar "ABC" type pattern did occur from the early 1930's through the early 1940's as the S&P Composite never did retest its prior low made in 1932.



Finally one of the more ominous looking chart patterns at the moment involves the NYSE Composite which shows a potential Head and Shoulders Top pattern with a well defined Neckline (blue line). Thus the Neckline support area around 6500 will be a key level to watch in 2012.