Dow Nears 50% Retracement; Tread Carefully 32 comments
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It seems like a really long time ago now, but it was less than a year and a half ago that the Dow Jones Industrial Average hit its all time high mark of 14198.10 on October 11, 2007. Those familiar with technical indicators will recall that a 50% retracement is a very significant mark for the direction of the market going forward. A 50% retracement from 0 to 14198 would put the Dow at 7099, and we came very close today with the intraday low at 7105. This support line could prove to be bullish; if the Dow holds these levels then from a technician's perspective it could prove to be a market low. However, beware if the Dow falls below 7100 because once that support is broken it could fall very quickly.
The Dow Jones Industrial Average has not been at current levels since 1997, and the next few days could be key to understanding just how low it will fall. Tread very carefully in this sort of market environment.
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On Feb 23 07:54 PM waingro wrote:
> Always remember, when everybody thinks stocks are never going to
> go up
again, it's precisely then that a bull market is born.
I thought it was cheap at 14,000 in the year 2000.
A very smart person (not me, obviously) once said: "A market that goes down 90% is a market that goes down 80% and then halves"
It seems to me this market is nowhere near low PE ratios just yet. And considering how much earnings are going to get ratcheted down in the near term, I think stocks remain grossly overvalued here. Once we have single digit PEs, then you can "put me in coach!"
I fully expect the market to overshoot to the downside.
The key to finally getting a decent value on stocks will be to look at stock valuations, not stock prices. Only from historically "cheap" valuations (below the l00 year average PE of 17 +/-10%) can we finally see the birth of a new secular bull.
I say this to point out how much more our economy needs to adjust. We have been over-consuming with borrowed funds. Most of us have a closet and a half of clothes, plenty of towels, no need for more gadgets, high priced skin creams, or overpriced jewelry. The good news is that we can cut back our spending on these items fairly easily without much pain. We never needed all that crap anyway.
If we were in a normal recession, a 50% drop in the Dow would be a smart time to look for a bottom. But this is not your average recession. When Paul Volker, George Soros, Allan Greenspan, all come out and say that this beats anything that they have seen in their lifetimes, that the financial system is destroyed, that a solution is not obvious but it will cost many trillions of dollars, you know we are in uncharted territory.
There is currently no cause for optimism. None. Nada. Investors are freaked that they are going to lose the other 50% they haven't lost already.
I'm going to go hide in gold stocks and silver for a while but my long positions will be getting battered so there won't be cause to rejoice if gold continues to move upward.
Think about how scary this will get if we can't make money and inflation starts to roar. Imagine your 50% down portfolio continuing to drop while prices are increasing by 20% per year.
At least Christmas shopping won't take very long...
(Beyond that, the market has never been worth "0" - so 0 would be a fallacious starting point in any case.)
Anyway, if one considers 1982 to be the start of the great bull run to 14K, then the 50% retracement level would be 7494.04 and we've already broken it. Using Fibonacci retracements, that would make the next target the 61.8% retracement at 5890.
of the year? NONE of them saw the market going lower."
First, I have to say that technicals are not really meant as forecasting. If you pay more attention, you'll hear the techs say things like "If the trend fails here, the next area of resistance is here". Or they may say "If the trend continues, expect AAPL to go to here".
And secondly, many techs have talked about major corrections. In particular, I'd point to Louise Yamada. She actually did call the DOW top at 14000 years ago, and shortly after the market dropped to 12,000 told CNBC's 'Fast Money' on TV that "If the trend continues, we should see 10,000". They all got a chuckle over that. She continued with, "If we continue to decline, the next major resistance would be Dow 6000".
She has repeated this value several times and you can Google for clips of the shows to better understand not only her approach, but her cautions. Well, you can, unless you are happy misunderstanding technical analysis.
jegan ;-)
On Feb 23 05:45 PM HiSpeed wrote:
>
On Feb 24 02:15 AM mr freddo wrote:
> There is currently no cause for optimism. None. Nada. Investors
> are freaked that they are going to lose the other 50% they haven't
> lost already.
>
> I'm going to go hide in gold stocks and silver for a while but my
> long positions will be getting battered so there won't be cause to
> rejoice if gold continues to move upward.
But that's all guesswork, what is certain is that we have much farther to go on the downside based on the need for the stock market to revert to its long term average (and well below for a time) and based on the economic outlook over the next few years.
> Re: "Anyone recall how bullish all the analysts were at the beginning
>
> of the year? NONE of them saw the market going lower."
>
> First, I have to say that technicals are not really meant as forecasting.
> If you pay more attention, you'll hear the techs say things like
> "If the trend fails here, the next area of resistance is here". Or
> they may say "If the trend continues, expect AAPL to go to here".
>
>
> And secondly, many techs have talked about major corrections. In
> particular, I'd point to Louise Yamada. She actually did call the
> DOW top at 14000 years ago, and shortly after the market dropped
> to 12,000 told CNBC's 'Fast Money' on TV that "If the trend continues,
> we should see 10,000". They all got a chuckle over that. She continued
> with, "If we continue to decline, the next major resistance would
> be Dow 6000".
>
> She has repeated this value several times and you can Google for
> clips of the shows to better understand not only her approach, but
> her cautions. Well, you can, unless you are happy misunderstanding
> technical analysis.
>
> jegan ;-)
Louise Yamada is one of the few chartists who gets it. She bases her technical anlaysis on much more than just where the lines point. She has a much longer perspective than someone like Carter Worth, who I used to listen to but after the October lows he has been busy justifying his "we're all in comment" as the market has failed to turn upward.
Louise Yamada is one of a handful of experts I listen to along with Nouriel Roubini and Meredith Whitney.
On Feb 23 07:54 PM waingro wrote:
> Always remember, when everybody thinks stocks are never going to
> go up again, it's precisely then that a bull market is born.
On Feb 24 01:42 PM dividendmachine wrote:
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