The Dow Jones has struggled since January, to rally only 5% higher than the 50% retrace of all losses of the first wave down (October 2007 – March 2009) of its bear market cycle. It has gained almost 2% on the high of January (today’s close 10907). The average gain over the last week or so, has been around 10 points per day, hardly a convincing bull run. The fractal on the chart over the last 2 months looks similar to that of the August 2007 to October 2007 extreme high, and we all know what happened from there. I am not saying that it can’t rally higher, just that it seems over-extended in time and seeks equilibrium.

The current market rally looks like another “sucker rally” to me, and is setting up for a stronger decline than we saw in January, when all gains (over 4 months) since September 2009 were wiped out in 3 weeks! This decline was over 900+ points or 9% of value, just short of the 10% which is a general indicator for a stock market crash – today’s markets really like to stretch the limits. So Mr X, go ahead and buy up if you like, after all, President Obama is looking after you… I hope. Just remember to get out quick when the Dow heads down to its recent low (of early February) at around 9800, as there will probably be a “gap down” once this point is breached. My ultra-high level for the Dow (on a 5% stretch past the 50% retrace level) as mentioned in DOW JONES – Stock Market Crash 2010, was at 10880 points, and the Dow has been sitting around 10900 points for a week now, and looking lethargic.

The March rally looks exhausted, the institutional investor’s money is running out, P/E ratios are too high, and the Dow is over-bought and over-extended. It is in the short term interest of Wall Street, the big banks, and governments to inflate this balloon as much as possible, but like all balloons when over-expanded they pop. The stronger forces (deflation) are much bigger than daily/weekly/monthly small moves (subject to manipulation), and will force a deflation of debt, these major forces will win in the end, its just mathematics. The next decline will likely come as a shockwave through global financial markets, unexpected and unforeseen.

So Mr X, my piece on the stock market crash has not dissolved, but the mountains of debt created to run this circus will dissolve, and real soon…

Dow Jones Chart – 22 January 2010

This last week has broken the sideways snail-paced rally of the last few months, and put the Dow back below the 50% retrace level again. Another strong confirmation that the Dow Jones has reached a major high, and will continue its decline, is that the January 2010 top completes a Gann 10 year cycle exactly, from the January 2000 major high, established just before the Tech bust (14 Jan 2000 to 14 Jan 2010 – 10 years to the day). If you are thinking of trading Dow Jones index on the short side, a nice spot to place your order is around the 10360 mark, to catch the inevitable reaction rally! Place your stop 100-300 points away, or to be sure, at 10880. On the way down, there looks to be some support at around 10050, then 9600, 9100, 8200, 6900, 5500. President Obama restricting bank’s investment in hedge funds is supposedly to blame for the market’s recent drops, but any story will do, when its due its due!

As written in previous articles (see Related Articles below) the Dow Jones (and world stock markets) are still in a bear market, yes, still on a long term cycle of decline, after the most exuberant period of financial growth and debt increase in history. The Dow Jones Stock Market Crash 2010 looks quite likely now, and will be longer and more severe than expected. As we have just seen the longest rally in the current cycle, we are about to witness the longest decline (in time) of this bear market cycle. This phase of the decline should last a minimum of 2-3 months, but with a few short-lived rallies, may go much longer. Mid-June 2010 looks like a pivotal time point for the year, and a possible bottom of this wave down. This is the “painful” part of the cycle, when total lack of hope sets in, as markets and banks unwind with unstoppable losses accrued daily. Lack of faith in the financial system sets in and the spiral goes more out of control. Credit evaporates and cash becomes scarce. Corporations fall, banks go broke, and government debt defaults begin. World leaders grasp at straws trying to regulate a working financial system into play.

Robert Prechter has a lot to say about deflation due to enormous debt growth. One of his main recommendations is to buy Gold as protection – Gold is always seen as a safe haven in turbulent times, and usually increases in value at such times.

How low will the Dow Jones Stock Market Crash go? Pretty low, as there are enormous amounts of debt built into the system, and all this debt needs to be resolved in a deflationary environment. Some analysts have forecast an extreme low on the Dow Jones of around 1500 points, this looks likely. The closest timing we could get to a possible bottom of this cycle, is late 2012, completing a Gann 10 year cycle from the 2002 major low.

See also: DOW JONES – Stock Market Crash averted by Economic Recovery?

The Dow Jones index shot up on Monday and hovered around the 50% point most of the week, unable to gain ground, before falling back below it late in the week. November 20 was previously mentioned as one of the significant time points to look for a reversal. This current time point is the most significant of all, especially when coupled with the price level, as will become evident. The Dow has finally recouped 50% of all losses shed during the global economic crisis, and in 50% of the time it took to lose them! Yes, you heard right, the unpublicised fact that 50% gains have occurred in exactly 50% of the time it took for the losses. This is why this current point is the most powerful for a reversal. In fact, the halfway point in time falls this weekend, so the actual top could be last week or the coming week, but either way, this week will prove the reversal! Gann would call this point, a “Perfect Square” – 50% in price, meets 50% in time.

In addition to this, we have just completed 110 weeks from the all time high, and as most technical analysts would know, 110 is a twin Fibonacci 55. Also, multiplying the March low of 6440 points, by the Fibonacci ratio of 1.618 gives us 10,420 points, which is almost exactly the high reached this past week. And finally, the Dow is sitting just under the 1994-2002 bottom trendline. These are all very strong indicators that we will see a major reversal on the Dow this week – so if you are thinking of going short, this is the time to load up – SELL!

In the extremely unlikely event that the rally continues (a miracle of economics), I would highly recommend buying Gold as the ensuing inflation will be unbelievable and currency (especially $US) will become almost worthless. Eventually the stock market drop would be a devastation, rather than a correction.

Before we start our review, let’s just do a very basic recap on the Fibonacci numbers: The numbers are created by the addition of the two previous numbers (in sequence) as follows:

0,1,1,2,3,5,8,13,21,34,55,89,144,233,377 and so on. The relationship of any number and the previous number is 61.8%, any number and the two numbers previous it is 38.2% and so on…The relationship of a number and the next number forward is 161.8%, two numbers forward is 261.8% and so on…

DOW JONES Index Fibonacci Review – VIDEO
View Chart (Large)

Source: http://www.screencast.com/t/MK86TlGu http://www.tradingwithgods.com/

The time points projected in the previous article DOW JONES Major High September 2009 have been passed, and in analysis terms, specifically Gann analysis, the Dow Jones would be described as being overbalanced in time – note the time points mentioned in that article, still all proved to be significant points. The target price level mentioned in that article has NOT been hit yet, 10,360 points, and this is the target level to break (by a significant amount) in order to prove that the bear market has ended.

Due mainly to fiscal stimulus, currency devaluation, and continued pump-priming by US (and worldwide) government, the current rally has over-extended in time, by a little. The crucial 50% retrace from Exreme High to Extreme Low (at 10,360 points) however, has not been breached, which means we are still technically witnessing a rally in a bear market. This will be noted as the biggest rally of the current bear market on the way down.

All the stimulus and fake value (currency) creation in the world, can not stop the inevitable unwinding of world markets – fuelled by rapacious greed and excessive debt – the accounts must eventually be balanced. The attempts by government to avert potential disaster, have only set us up for a bigger fall. The rebalancing will be more severe, and much longer in duration, quite likely leading us into Global Depression.

Significant time points to look for a reversal:
October 26-28, November 20, December 8-21

It is extremely unlikely that the Dow Jones will go above 10,360 points by a significant amount. If they pull off the miracle of the century and it does, then we will likely see a tremendous devaluation of currency followed by unbelievable inflation. Gold is the investment of the wise, and will continue to rise in value considerably into the future. If you have substantial money to invest and don’t want to see it eroded by currency devaluation (which is happening anyway), buy Gold now, and hold it.

See also: DOW JONES Major High November 2009

View Chart (Large)

Source: http://www.screencast.com/t/yN90cQ8j08 http://www.tradingwithgods.com/

The Dow’s chart seems to be following the bear market fractal, of its chart from 3 September 1929 extreme high, to the extreme low on 8 July 1932 fairly well. The time and price scales may vary in range, but the same fractals seem to be playing out. This was the most significant bear market in stock market history (1929-32), where 90% of value was lost, and today’s market similarly, looks like being a history maker too. If the Dow continues to follow this course, it would appear to be near the end of this rally in a bear market. 9 March 2009 proved a major low, and from this point the rally commenced with gusto. The rally was essential, for the market was over balanced as a result of the incredible selloff of early October 2008, which flowed into a volatile, but incessant slow run down into early March 2009.

On the fractal of 1931, as applied to now, we will likely see this last leg up as a gun rally, straight up vertical, for 1 to 2 weeks, not much longer. For likely points to hit top, in time and price, we can apply some basic Gann. 6 months, 26 weeks, or 1/2 year going up into September, is a very strong point to look for change in trend. The 50% retrace point for the whole run down from 11 October 2007 (14280 High) to 9 March 2009 (6440 Low), is at 10360 points, and this is the point the Dow needs break, by a significant amount, to show any potential for a true recovery. This is also the level from which the Dow began the massive falls of early October 2008, culminating in the March 2009 low. A soft support level exists at around 8000 points, and we would expect to see faster drops once this point is significantly breached.

The ongoing bear market was confirmed when the Dow broke 2 major 50% points, including 50% of its value from high (14280×50%=7140), by a significant amount (7140-6440=700 points exactly). The other 50% level broken (by almost 1000 points) was at 7425 points, wiping half of all gains (over 33 years) since the 1974 extreme low (570 points, 9 December 1974). In terms of basic technical analysis, Gann style, breaking these points by such a margin would strongly indicate that the market has further to fall, before we see extreme low. Following the 1929-32 fractal, the 6440 low of March 2009 will be broken, never to see daylight again, not for a long time, but should prove a ceiling for a future major high (mid/late 2010) from where it will continue its decline even further.

So its crunch time on the stock market, 1/2 a year up, 50% (retrace) of losses recovered (at 10360), this is the point of a likely top, and the end of the bear market rally. This will be noted as the biggest rally of this bear market run down, and following the fractal, we won’t see another rally this long until after extreme low has been reached (2012, 2014?). Major high may hit in September, but the drops won’t be too bad to start, 2 lower tops will show weakness, and then the real drops should begin (~late November 2009), an unstoppable run down to early April 2010 at least, with only a couple of short rallies on the way down.

Major High – Dates to watch:

September  3  10  16  22

Target Level:

10360 points

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