DOW Long Term Analysis

DOW and SPX very long term analysis as of March 6, 2009:

Best or Worst case scenario: trading in long term consolidation period or continuing death spiral?

The recent market actions are showing extreme bearish actions selling off 58% since the Oct 2007 stop resembling the 1929 and 1973 bear market scenarios. I commented on the comparative market analysis of 1929, 1987, 1997, and 2007 on my comments during 2007; and now we are experiencing the market crash scenario since the Sept/Oct 2008 crash like sell-offs. Many anticipated the market sell off since 2007 going into 2008 sell-off. The current bear market action is well anticipated by many market participants as the market sentiment can be seen in some indicators showing positive divergences comparing to the 2000-2002 sell-off -- money flow in long term as example is showing a positive divergence. The long term positive divergences can be seen on the DOW and SPX long term charts shown below. The customized Trend Strength and direction indictor which I developed is showing over sold condition as it is shown on the DOW monthly. The indicator set on major markets are showing the similar readings. Tested on the various time frame and major markets, we can see it on the DOW monthly chart, after the strong trend during the last 20 years since 1980s for 20 years, the indicators are in oversold level after the major sell-off during 1931, 1943, 1973, 2002, and 2009. This is confirming that markets are clearly oversold and show positive divergence.

The question remains whether we have seen a major bottom for the markets. As commented on my previous cycle analysis, we are now entered into major market correction period since the Oct 2007 as we can see that we are going through major financial and economic crisis such as bursting of debt bubbles bankrupting major banks such as Bear Stern and housing market crash. As noted during the last few years, the crisis which we are facing is expected as we have seen the ARM housing market bubbles and which we are still assessing whether we are seeing housing market stabilization. While it is very difficult to assess whether we have a major market bottom based on the fundamental analysis, we can better rely on technical analysis as it is more objective and mathematics. Based on my market analysis over many years, this is the case that markets do find market tops and bottoms regardless market participants' extreme sentiment. Therefore, in my opinion based on the analytical point of view, I am still holding the view that financial markets lead economy and think that this is the case for this bear market.

Given the current economic and financial condition described above, in my opinion, the best case scenario is a long term consolidation period in LT megaphone RST formation as shown on the very long term charts: DOW 1920-2009 and SPX 1871-2009 as shown below. Given the current market volatility, the long term chart is showing a distorted view as it does not show the market crash of 58% destroying many long term investors' wealth since 1996. Before commenting on the fractal scenario, given 58% correction, the long term chart should visually show the price below the mid level on the chart, but that is not the case in reality, we need to keep that in mind.

As shown on the DOW Long Term 1920-2009 chart, the best case scenario given in the current market and economic condition is that markets consolidate in megaphone RST formations in a long term. DOW has rallied almost 30 years after finding a major bottom during 1931 after the 1929 crash. It consolidated for almost 20 years during the 1970s. Then again, the market rallied during the 1980-2000. We are now in the bear market since the March 2000 top showing a long term RST formation. That is the long term 40 year cycle within the long term 80 year cycle since the 1920s. Considering the market volatility, it is difficult to predict the market direction with 100% accuracy; however, we are likely seeing a completion of the 5th wave correction from the October 2007 top. Based on the long term and short term price action analysis within the context of the fundamental conditions, I see the best case scenario is that markets are consolidating in a long term in a fractal formation of the 1930-1980 long term price action. Hopefully, this is the case, otherwise, we are heading to in death spiral dire economic condition wiping out many small investors' life time savings.