It's "Déjà' vu" all over again! Last October, I wrote a column that looks a lot like this one. But, this time, while it is the same game, the players are all switched around. In that column, it was clear that a key showdown was very near and that the bulls and bears were about to go head to head until one of them flinched. In that rumble, the bulls flinched first.
Of course, to be honest, it took a major financial problem to give the bears their edge, but they did get it, and that is all that really counts in the end. It all began one August morning when a French bank refused to accept a AAA-rated financial package called a derivative. They said that the contents of the derivative were so complex they could not accurately value it.
Thus began the onslaught of big problems for the financial markets. It was the tool the bears needed, and I suspect that without it we would likely be challenging the Dow 15,500 level right now. But, that was not to be.
In my column that week (Oct. 16, 2007), I used the scenario of a major game about to be played. Only this game was on a worldwide playing field. I had seen the scenario before, most recently in 1995 when the bulls won and the most historic rise in the world's stock markets began in earnest. I said that the same set of circumstances was in place last October, and we were about to witness one or the other of the two players knocked down pretty good. In this one, the bears won — maybe some payback for the 1995 shellacking they took.
Anyway, here we are again, about to see the "scrum" begin once again, for those of you that follow rugby. This time the bulls are underdogs, say the odds makers. Of course, they said that about the bears last fall, too. Anyway, this week may be the week that sets the direction of the market for the next four to six months, just as the October 2007 meeting did.
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The best way for me to set the playing field up for you is to turn to my trusty Super Chart once again. Those of you that follow my Super Chart know it signaled a sell mode as of Feb. 8. I have had some questions about this signal, as I told you a few weeks ago, but the charts are dicey enough for me to be wary here and want to lay it all out for you.
Let's start with the Super Chart for the Dow Jones Industrials cash index just below.
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Not long ago, I showed you this chart and told you that a chart formation called a "down head and shoulders" formation was being built. Well, that formation is now very near completion.
What does that mean — near completion? Well, it means that unless the market decided to just go almost totally sideways, the chart must either cross down what is called the "neckline" or it must rally strongly and break the formation to the upside, totally away from the neckline.
The case for a sideways move here is small, but enough to be worth mentioning. I have only seen that scenario occur two times over the years on a major chart, as I recall at the moment, and in both cases the outcome was a very sluggish market and months of nowhere trading. I put the odds of that happening about one in five — not very high odds.
What is the more likely outcome for the Dow? I suspect it will be a tremendous battle to hold prices above the neckline on the chart. But, if the prices do break up or down decisively, that will likely occur all in one single day, resolving and sealing the fate of the market's direction for the next four to six months.
I have clearly marked the neckline for you at the Dow 12,100 level. I have also circled the parts of the formation called the "shoulders" (left and right) and the higher formation called the "head." The neckline, as you can see, is the foundation upon which the entire formation is resting. Note also that the entire formation has taken over 16 months to complete. This is a "major formation" in the language of the chartist.
Chart history has shown that if this neckline is penetrated down through the neckline and closes below by more than 1 percent (in this case about 125 Dow points) the likelihood of the formation "fulfilling its predicted drop" is about 75 percent. Those are substantial odds to reverse if the neckline gives way and you are a bull.
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Now, what, you may ask, does "fulfilling its predicted drop" mean? It means this. By measuring the distance from the neckline to the highest point on the head area and then projecting this total distance from the neckline down, you will see the minimum predicted low that will result from this formation. How often does it "fulfill"? About 80 percent of the time, on average. Again, really huge odds to beat.
And just where is the predicted low if the neckline breaks to the downside? The down move bottoms out at about Dow 10,100. That is a big move and would clearly take the market into a major bear market move. If you are short and you are a bear, this is great news. If you are a bull, it is not very good news at all. But, as I observed in the October column:
"So what's the big play? Well, the bears see the recent assault by the bulls on the Dow 14,000 level as a bad play by the bulls. The bears sensed pushing so hard may have exhausted the bulls, making them ripe for an attack. …….. (But) This move by the bulls was a big gamble and it is either (1) going to ignite a sharp drive to truly lofty levels or, (2), as some bears fervently hope, it will have exhausted the bulls so thoroughly that this time the market will really plunge — big time."
Folks, we are about to see if it is the "big time" again or not. This time it is the bulls that are backed into a corner. If it is that fateful moment for bulls, then the advice I gave you in early January to be defensive in your portfolio holdings will serve you well. And if it is the bulls turn to turn the tables, then the cash I asked you to raise will need to be put to immediate use. Frankly, I am not sure who will win this scrum, but it will be a doozie of a "scrape," that is for sure.
Below is the S&P 500 cash index chart. You will note that the 500 stocks it represents have traced a very different looking chart than the 30 Dow stocks. This is one reason that I do have some reservations that the bears can prevail here. Typically, the charts are at least somewhat similar in big breaks.
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The S&P chart clearly shows that we are certainly on a very important support here at S&P 1,325. If, for illustrative purposes, we apply the Dow scenario to it (measure the support to the top of the formation. Remember, this is not a head and shoulders formation) and then extend it down from the support at 1,325, it says the S&P bottom is about 1,080. I only show it to you for information purposes, as its formation is not at all like the Dow's. But, if the Dow breaks, we might need to know what a possible bottom for the S&P might be. And don't forget, we are currently well below the Super Chart keyline, a clear bear mode.
But, again, let me repeat. The stage is set for a gigantic struggle here. I suspect from past experience that it will not be a long drawn out battle. It will likely happen in one or two days when the support just gives way or a huge rally races prices up and away from the Dow neckline area at 12,100. But, be advised that this move is close — very close!
This Friday might be part of the catalyst for the move, the February employment report. So, be very alert to that report event. Or it could be the next FOMC meeting on March 18, so be alert to that one too. Or, unlikely, but possible, the Fed could even act to lower rates before its coming meeting, which would really stir the pot! We will see. The stakes are high and the battle lines drawn quite clearly. Places everyone, the curtain is about to go up.
Boy, do I love this business or what!! Never a dull moment — never!
Well, I got carried away there a bit, but I hope you get the message that we are at a moment of truth here, and the outcome will give the market its direction for the next four to six months, once again.
Stay tuned and I will give you blow-by-blow analysis and some good ideas of what you might do to further protect your portfolio or, if the bulls win out, where to deploy cash to be part of that move.
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So, as always, I do hope your investment week is a good one. In the meantime, you keep in touch. I do! See you next week.
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