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Posts Tagged ‘Dow 32000’

Dow 32000 revisited

Posted by Danny on December 12, 2016

In August 2013 I posted an article with long term price projections for the Dow Industrials based on a remarkable price symmetry since the 1932 depression lows: The case for Dow 32000
The article called for a major peak near 32000 or 19410 by late 2016 or early 2017. So here we are in late 2016 and the Dow has just reached that minimum target of 19400 last week. This is the perfect time to update those projection charts and have a little look what could be up next.

In my article I mentioned 3 conditions that would need to be met for the Dow 32k scenario to remain in play. The market was just having a bit of a pullback after climbing above 15k for the first time, and there was plenty of talk that the top was in and the market would crash. This were the 3 conditions:

1) The current correction has to be shallow and cannot venture too far below 14000 before recovering.
2) The green overhead resistance line, connecting the 2000 and 2007 highs, will have to be overcome and left behind. That’s not going to be an easy feat. But with all the ongoing QE, who knows?
3) This breakout above 17000 would have to come by summer 2014.

The first condition was met easily as the pullback was short and shallow with a bottom near 14700 before climbing to new records in 2014 and 2015.
The third condition was also met as the Dow nicely climbed above 17000 in the summer of 2014.
But the second condition, leaving the green overhead resistance behind, did not pan out as can be seen in this chart:

djia-monthly-10_1984-12_2016

And that’s how we did not get to 32k, but we have reached the lower peak target of 19400. Does that mean the top is now in and we can bet on a crash? Well, not so quick. The possibility exists that the market is starting its final ascent and may reach the 30k-32k in an 8 to 12 month blow-off peak. We still don’t see massive investor euphoria and if the Dow climbs to the upper bound of its trend channel since the 2009 lows (dashed grey lines) then it could get there. The pink ellipse shows the projected target area in this scenario.

I will go to S&P 500 charts to study how such a final surge might play out. This is the current situation with major trend lines drawn in:

sp500-monthly-10_1999-12_2016

The S&P is clearing one of the last overhead hurdles near 2250 (green line) and if it decisively breaks through that level then the door will be open for a climb to the upper bound of its trend channel since 2009 (blue lines). In fact, neither the Brexit nor the US election fears pulled the market back to the lower trend long term trend line (blue), which supports the case for such a surge. The S&P is already following a steeper rate of advance (given by the dashed grey line) since early 2016. If it keeps this up for another 8 to 12 months the S&P will be in the 2600-3000 zone. This is the same rate of change it kept going for more than 3 years in 2012-14. If it keeps it up for another year then the S&P would be in the 3000-3200 area. Both target zones are shown with pink circles in the chart and appear doable.
This analysis helps us to see what it will take for this scenario to stay on the table. S&P will need to break above the green line quickly and then go on to 2500-2600 fairly soon, probably before summer 2017. Then a final autumn autumn moonshot could take it to near 3000, which would become an obvious attractor at some point.
We can also see what would invalidate this setup. Any decline below 2000 in 2017 would tell us the long term advance since 2009 has ended and that would definitely take the quick surge scenario off the table. Any sustained drop below the dashed grey line, currently near 2100, would already suggest this scenario is not making it. So, that are the lines in the sand that I am going to watch carefully.

If we do get a surge to 2600+ next year then it is likely to be followed by a steep decline in 2018-21. This is what would become my base scenario after such a blow-off peak:

sp500-monthly-9_2004-12_2016

Major long term support will be in the 1500-1700 area in the early 2020s, so that would become an important target if there is a crash or bear market.

What are the odds of this coming true? I think there is currently about 20% chance to get this kind of runaway market in 2017, and the odds would go to 40% if the S&P gets above 2300 quickly and keeps climbing in January – February.

***

Let’s finish with a look at the shorter term Nasdaq chart:

comp-daily-4_17_2015-12_9_2016

New records with the Nasdaq breaking above 5400 after earlier hesitation at that level. All indicators are pointing up with further room to rise. No signs of a peak. All we can do is go with the flow.

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What happened with Dow 32000?

Posted by Danny on November 23, 2015

Today we revisit the Dow 32000 scenario that I have updated from time to time since the summer of 2013. The Dow has not kept up with the 1920s in recent months, but the Fed has also not started raising rates yet. What will happen when they do? More on that below, first we take our look at the S&P 500 (click image to enlarge it):

S&P 500

The market is climbing again. The Earl and MoM indicators are going up, but the slower Earl2 (orange Line) is still high and going down. This suggests that the market needs more time to digest the October rally. I am looking for the S&P to stay sideways in the 2000-2100 range for several more weeks.

The last time we looked at the Dow vs 1920s chart was back in May. I have updated the chart and here is what we have now (click image to enlarge it):

dow2010vs1920_upd8

The Dow needed to climb to 20000+ to catch up with the 1920s trajectory. That clearly hasn’t happened. Of course that doesn’t mean we will not get any blow off rally to end the bull market that started in 2009. In the 1920s the final parabolic move didn’t start until the Fed started raising interest rates. Sooner or later we are going to find out if that repeats itself this time.

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Breakout imminent

Posted by Danny on May 4, 2015

Stocks weakened last week, but the Nasdaq remains in the rising wedge pattern that started last year. It is still not clear which way the eventual breakout move will go. Here is the current Nasdaq chart (click image to enlarge it):

Nasdaq

Thursday’s drop threatened a breakout to the downside, but Friday’s recovery shows the Nasdaq might try to hang on. We remain in a lunar red period until later this week, and my technical indicators are pointing down with bearish divergences in place. This means the Nasdaq remains at risk of a sudden sharp drop as long as this pattern is not resolved.
This is still not an attractive entry point for investors who are looking to go long. So, I would wait until the sky clears.

The LT wave for April did a good job, indicating the main swings of the month pretty well. Here is the LT wave for May (click image to enlarge it):

LT wave May 2015

The wave projects weakness in the first half of the month followed by a stronger period. The lowest values come on May 6-8 and on May 15. The highest value of the month is on May 21, with smaller peaks on May 3, May 11 and May29-30.
As always, use this LT wave with the necessary care as it is an experimental method.

I have also updated our Dow 32000 scenario, comparing the current market to the great bull run of the 1920s (click image to enlarge it):

Dow vs 1920s

For the first time in more than a year we see the market deviate a bit from the pattern it followed in the 1920s. This had to happen sooner or later. As I pointed out in the most recent review of this scenario, the Dow needed to climb to 20000 this spring to stay on track, and that has clearly not happened. Of course, the Dow could catch up by reaching the 20000 level this summer, and then it would be back in line with the 1920s. But that remains to be seen of course.
Interestingly we are ending the period that was marked by mild recession in the 1920s scenario and closing in on the point where the Fed started raising interest rates. That sparked the final mania stage in 1928-29. Are we setting up for a repeat? Most investors are probably not prepared for anything like that, so it could be interesting.

Good luck,
Danny

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Dow 32000 remains on track

Posted by Danny on November 3, 2014

Markets continued to surge last week, racing right back to new record highs for some indexes. With the month of October behind us I am updating my Dow 32000 scenario, which just refuses to go away, and we will also look at potential causes for a final mania. But first we take our weekly look at the Nasdaq (click on chart to enlarge):

Nasdaq

The current market situation is quite similar to last February, when the market recovered equally quickly from a sell-off. The current rate of change cannot be sustained for very long, and overhead resistance is now looming near 4650 and 4700. Technically my Earl indicator is just turning down and the MoM is reaching very overbought +8 territory. But just like in February the slower Earl2 still has a lot of room to rise. The market may hold up near current levels for a while, or it may start another leg down like it did in March-April, there is no way to tell at this point.
I don’t think we will get an exact repeat of March-April. I would rather look for a quick drop to ~4500 and then another rally attempt.
The LT wave chart for November looks like this (click chart to enlarge):

LT wave

The LT wave was not perfect in October (it never is), but it signaled some downturns and correctly showed the strength in the second half of the month. For November it shows renewed weakness in the first two weeks, followed by a stronger period with a peak value around the 20th-22nd.

***

I have also updated the Dow comparison with 1920s for October (click chart to enlarge):

Dow vs 1920s

Despite ebola and geopolitical tensions around the world the Dow just keeps mimicking what it did in the roaring 1920s. Amazing? Well, the roaring 20s came on the heals of a deflationary shock that saw the stock markets drop some 50% in two years. The 1920s had historically weak GDP growth per capita. And the 20s had an overactive Fed which kept interest rates very low for a long time. And of course, investors remained very skeptical about the rising equity markets. In other words, pretty much the same as what are having since 2009.
We have now come to the point where the stock market took off again. For the scenario to stay on track the Dow will have to climb to ~20000 by next spring. If the Fed sticks to the 1920s playbook then it will start raising rates in summer 2015 and that will cause the stocks to make a blow-off top over the next 12 to 18 months. Of course, that would be in a perfect universe…
But why would stocks make such a moonshot when interest rates start to go up? Well, that’s why. Who wants to hold long term bonds when interest rates are set to go up? Long term bond prices are artificially inflated by the Fed’s QE programs, which were designed to push long term rates down. What happens when that manipulation stops? Right, the price of bonds will probably go back to a more “normal” level. What could that level be for long term treasuries? Here is a weekly chart (click to enlarge):

Bonds weekly

Before and after QE1 (Nov 2008 – Jun 2010) the long term bonds (ZB) hovered between 115 and 120 (pink oval in the chart), which means a long term rate of about 4.5%. Subsequent QE programs have pushed ZB up above 140, which means a current  very low long term rate of 3%. I think ZB could easily fall back to the 115-120 area without the support of further QE programs. Long term bond holders then face a 20% loss. Once this starts happening investors will realize that it is better to be in cash or stocks until bond yields are more attractive again. We already got a taste of it three times since 2009: every time bonds have declined stocks have been doing very well:
*Jan2009 – Apr2010: bonds down 15% -> nasdaq up 56%
*Sep2010 – Apr2011: bonds down 12% -> nasdaq up 34%
*Jul2012 – Dec2013: bonds down 18% -> nasdaq up 42%

My long term chart now suggests that bonds have peaked out once again. There is a broad bearish divergence in my Earl indicator and the Earl2 has turned down recently. If bonds ZB drop back to 115-120 in 2015-16, then where will stocks be? Higher? Much higher? Dow 32000, after all?
The big risk with QE was probably never that stocks would crash when the program ends. The risk has always been that stocks could surge when QE ends, thus forcing the Fed to raise rates to reign in a runaway equity market. But raising rates could drive even more money out of bonds and into rising stocks, further destabilizing the situation and feeding into a speculative stock mania. The bond market is nearly twice as big as the stock market, so when money starts fleeing bonds it can have an outsized effect on stocks. That’s what we got in the 1920s and that’s what we now risk getting again. QE is a stingray, dear readers, all the poison is in the tail end.

Good luck,
Danny

 

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The case for Dow 32000 Updated

Posted by Danny on August 27, 2014

Here are some updates on a series of long term charts I posted last year. Interestingly the case for Dow 32000 is still alive and kicking. Who would have thought?

Let’s start with the Dow going back to 1928. This is a very large image, so click on it to see the full detail:

Dow monthly

The Dow has reached the long term overhead resistance line connecting it with the 2000 and 2007 peaks. It has also kept above the trend line that started from the 2009 lows. The market is increasingly squeezed between these two lines, not able to make up its mind where to go next. But we are going to find out soon.

Zooming in on the recent decades we can see the situation more clearly (click for larger image):

Dow monthly

The Dow has been sputtering near the 16500 resistance level all year. But now it appears to be breaking out above 17000. And that was the final criterion for my Dow 32000 scenario, as I wrote last summer:

A few conditions will need to be met for this very bullish scenario to remain in play:
1) The current correction has to be shallow and cannot venture too far below 14000 before recovering.
2) The green overhead resistance line, connecting the 2000 and 2007 highs, will have to be overcome and left behind. That’s not going to be an easy feat. But with all the ongoing QE, who knows?
3) This breakout above 17000 would have to come by summer 2014.

So, what next? The breakout above 17000 could still prove to be a false breakout, and that’s what more than a few market observers are calling/hoping for. But I would not rule out the case that this market will simply continue to climb to 20000+ by early next year. Few people are betting on it, the market “needs” a correction, isn’t it? I would rate chances for a further climb at 30%.
Another possibility is a drop to ~15000 this autumn, which would break the up trend line since 2009 and clean out “weak hands”, only to rebound and climb to 20000+ in 2015-16. I would rate this a 50% chance.
Third possibility is a drop to ~15000 with no buyers showing up and then a further decline to 10000-12000 or lower. I would rate this a 20% chance at the moment.

Good luck,
Danny

 

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Is the breakout for real?

Posted by Danny on June 9, 2014

Stocks have pushed to new highs in rather convincing fashion. Is this a real breakout, or a just blow-off top?
Here is the current chart for the S&P 500 (click for larger image):

S&P 500

Our lunar red period has not stopped the recent rally and the S&P 500 chart is showing a clear breakout from the recent sideways pattern. This kind of breakouts is usually tested, so I think the market will drop back to 1920, where resistance should have turned into support, before possibly heading higher in the next lunar green period. Meanwhile my technical indicators have dissolved the bearish divergences that plagued the market since the start of the year, and there is now further room to rise based on the long term up trend channel. A drop below 1850 would tell us that this is a false breakout.
We cannot rule out a peak at this point, but on blogs and social networks I don’t see the kind euphoria that normally comes with major tops. Rather on the contrary, I see massive disbelief, cynicism and even anger about this stock market’s continued climb. Everybody seems to be trying to go short at the top. Comparisons with 1929 or 1987 have been getting extensive coverage in financial news media, implying that we are about to crash. Few and far between are the calls for a continued bull market.

It is one of the great benefits of writing a financial blog or newsletter that the responses (or absence of them) often provides good clues where the market is actually going. For the last couple of years, whenever my analysis or chart points to an impending decline in stocks, it gets comments and likes on twitter. But whenever I post a bullish scenario it just harvests silence. And for gold it has been just the reverse. So, I have gradually learned to doubt my forecast if too many readers agree with it. The scenario that nobody believes is not rarely the one that pans out.

For example, almost nobody is considering the possibility that we are in a repeat of the 1920s, a scenario I have been watching since last year. Since our latest update the odds for this scenario have continued to go up. Here is the updated chart (click for larger image):

Dow vs 1920s

The correlation between “Dow Aug 1921 – Nov 1926” and “Dow Feb 2009 – May 2014” has now climbed to a whopping 90.4%, up from 81% when I first posted this chart. The case has become even more compelling with the news that Q1 US GDP was negative. A mild recession in 1927 also forced the Fed to delay their unwinding of ultra-low rates. When they finally started raising rates in 1928 it caused the stock market to double within 18 months, and then a collapse into the great depression. The Fed is quietly setting us up for a similar disaster, simply repeating their mistakes from the 1920s.
One of the conditions to keep this scenario on the table was that the Dow needs to break out above 17000 this year. We are now very close to that point. I still think the market will deviate from the 1920s at some point. But the question is: when? Keeping up with the roaring twenties would give us Dow 20000 by early 2015, with the market spinning out of control after that. If so, I would expect to start getting comments and likes for bullish posts, while harvesting silence for bearish scenarios. That’s how we will eventually know when we are close to the top.

Good luck,

Danny

 

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Can we avoid Dow 32000?

Posted by Danny on March 10, 2014

Stocks reached new record highs last week, right at the end of our lunar green period. That marks the first solid green period in quite a while and suggests that normal lunar cycles are coming back. I think we will see a pullback in the current red period, but probably not as deep as many traders expect.
Let’s have a look at the S&P 500 (click for larger image):

S&P 500

Last week’s high could mark an important top for the market. It depends how much of a downturn we see in the next week or two. If the pullback is mild then a push above 1900 is in the cards for the end of March. My technical indicators give a mixed message with the Earl2 showing no signs of peaking out yet. So there is further room to rise, but I think the overhead resistance levels around 1900 and 1940 will prove to be a tough barrier. April is likely to become interesting as it will be a month with eclipses. More on that in next week’s post

***

With the month of February behind us I have updated the comparison chart with the 1920s. When I first posted this chart in June last year it looked like a very remote scenario. But the case for Dow 32000 has held up unexpectedly well. One of the main conditions to keep this scenario viable was for corrections to be very shallow. That has been the case in 2013. Now it remains to be seen if the Dow Industrials can push above 17000 later this year. That’s the second condition for this scenario to remain on the table.

Here is the updated comparison chart (click for larger image):

comparison with 1920s

The correlation remains very high, and already started well before the bottom of the bear market. This correlation in itself is nothing remarkable, as it is always possible to find stretches of market action that look very similar. But what we have here is that the market circumstances were also very similar to the current ones. I have marked the major phases in the chart (1 to 4).
The 1920s started with a deflationary depression which was followed by a long period of ultra low interest rates with the Fed expanding its balance sheet. We have been going through the same playbook and have now arrived at the point that corresponds to August 1926. At that point the stock market started sputtering and in 1927 the US experienced a mild recession. In 1928 the Fed finally started raising rates. Instead of pushing the stock market down this marked the start of the blow-off phase with stocks almost doubling in the next 18 months. So much for “don’t fight the Fed”.

Could this happen again? I would rather ask: can it be avoided? If we continue along the same trail, then look for the economy to sputter in 2014 and that will keep interest rates near zero for the rest of the year. In 2015 the Fed will start tightening and that will cause stocks to break out to the upside. Why to the upside? Bonds inevitably go down when interest rates go up. This causes some money to flow out of bonds and into stocks (which look “safe” again in the eye of retail investors) and is a process that can start feeding on itself uncontrollably. At that point a disaster is inevitable.
In trying to avoid another great depression the Fed will then have managed to set the stage for one.

What would it take to write down this scenario? If the Dow drops below 14000 in 2014 then the odds would become very small.

Stay tuned,
Danny

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The case for Dow 32000

Posted by Danny on August 30, 2013

If you look at a long term chart of the Dow Jones Industrials it is interesting to see how symmetrical the advance since the 1932 depression lows has been.
You could turn the chart upside down around a point in late 1974, and it would look almost exactly the same.
This chart lines out some of these symmetries (click for much larger image);

Dow symmetry

If this symmetry is to run its full course, then it asks for a major high in late 2016 or early 2017. Feasible?

If the symmetry continues then the price action since the year 2000 peak should resemble the price action of the first 17 years since 1932, but mirrored. In the next chart I have done that exercise (click for larger image):

mirror

Lining up the 1949 bottom (becomes a peak in the mirror image) with the early year 2000 high gives a good match. While there are obvious differences, we can see that most tops and bottoms line up well.
Overlaying it directly we can get this (click for larger image);

mirror 2

Here I have matched the 1949 mirror high to the 8000 level for the Dow, which puts the correction low at 6470, which was the actual low in 2009. That sets out an upside target of 31130 by the end of 2016.
By the way, I have always thought that 8000 would have been the natural high for the Dow in 2000, if it hadn’t been for easy Al’s monetary policies.

Long term trend lines that have been in play for decades are also showing a convergence around 32000 by late 2016 (click for larger image):

Dow targets

Zooming in on the potential price targets:

targets

The most optimistic target is just above 50000, not one I consider very realistic, unless we get hyperinflation.

The trend channel that started in 2009 is targeting 30000 by late 2016. This advance happens to be climbing at exactly the same rate as the 1994-2000 bull market. Can this be kept up for three more years?
A few conditions will need to be met for this very bullish scenario to remain in play:
1) The current correction has to be shallow and cannot venture too far below 14000 before recovering.
2) The green overhead resistance line, connecting the 2000 and 2007 highs, will have to be overcome and left behind. That’s not going to be an easy feat. But with all the ongoing QE, who knows?
3) This breakout above 17000 would have to come by summer 2014.

If we get a deeper correction to 12000 or something, or if the market fails to break above the green resistance line, then 19410 becomes a viable lower target to be reached in 2016.

In all these cases, a 2016 top would mean the end of this symmetric pattern, and may be followed by a 1930s style crash and depression. That would take the Dow all the way back down to 4000-5000 by 2020.

Let’s just see what happens.

Danny

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