A Crack in the Dike

November 13th, 2013
in contributors

Written by

By early March 2009, the Dow Industrials had declined to 6469.95 from its (then) all-time High of 14198.10 in October 2007, a loss of 54%. Stock portfolios had been devastated. Almost everyone believed that the stock market would continue to fall. Even the leading lights of industry predicted a further decline, as well as the "death of the dollar." There were only a few who proclaimed that a major Low was near, and that a resurgence of the market was bound to follow.

Follow up:

It was the few who were correct. The Dow bottomed in early March 2009; and the upswing which followed has become the Great Rally - the most astounding countertrend rally of all time. We had thought, several times, that it was coming to an end; but each time we were mistaken. Now, however, we have reason to believe that the rally is breathing its last. By several measurements, investor confidence in a continuation of the market's rise is extraordinarily high. Complacency rules the market; fear is almost totally absent. "Breadth" is narrow. Minor rallies are caused by a rush to buy in only a few select equities.

The October 30 all-time High in the S&P 500 was marked by the appearance of a classic Candlestick reversal pattern. A larger multi-bar pattern appeared on November 7. In each case, the S&P fell off materially after the patterns appeared, to a Low of 1746.20 on November 7. From that point, the S&P advanced rapidly on November 8, but came to a halt and traded horizontally on November 11. The aggregate sentiment of the traders appeared to one of "indecision." Our Indicators were not at extremes; so it was difficult, if not impossible, to forecast which way the S&P would move.

The price action in the S&P so far today may offer a clue. We see a "Tower" formation in the 60-minute chart, in which the flat trading of November 11 has been bracketed by a tall white Candle which appeared on November 8 (a Friday) and by a tall black Candle which appeared yesterday, November 12. We take the "Tower" pattern as bearish in tone.

While this is hardly definitive, it is at least a clue. The formation may be obviated by a price rise which totally overtakes it.

We take the pattern for what it is - a warning.

It would be vindicated by a decline in the S&P to a point below 1746.20, which was its Low on November 7. A drop below that Low, together with a concomitant dtop in the Dow Industrials, would strongly suggest that the Great Rally is finally over and that a powerful market decline is on the way.

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.

 navigate econintersect.com


Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2018 Econintersect LLC - all rights reserved