Stock Market Update 01 November 2008

Welcome to the latest issue of ECAM.

Over the past month we have experienced one of the worst stock market declines since the Great Depression. I cannot stress enough my belief we are in the first stage of a forthcoming decade of flat-to-declining stock values along with forthcoming record levels of unemployment and a severe worldwide recession (Kondratieff Winter). My previous blogs have addressed those issues so feel free to review previous writings if you are interested in the details. Today's blog will center on where we are today.

Even during the worst bear markets there have been periods when stock values rise (sometimes substantially). These short term counter-trend rallies offer those who have not exited their stock positions a chance to lighten up (or go to cash) and also allow those who have been in cash a chance to "position trade" in and out of equities in an attempt to increase the value of their portfolio. We may be on the verge of such a counter-trend move.

The first chart is a 3 month candlestick chart of the Dow Jones World Index (click on the following charts to enlarge):

DJW 3 month chart:



The key to note is the orderly nature of this chart until Oct 20. Since then, trading action has produced huge gaps on the chart indicating the level of market stress over the past 2 weeks.

The key to note is the bullish divergence in the MACD histogram. Also key is to note the last "lower high" @ 184.08. Any closing price greater than this would be bullish.


DJW 1 year daily chart:



The 1 year daily line chart shows the down trending channel very well. I have drawn a line at the 184.08 price level mentioned previous. While I would normally wait for a cross of the 50 day moving average (currently @ 213.35) to enter a long position, the deeply oversold nature of the markets tells me the forthcoming snapback rally could potentially be huge. As such, I anticipate I will forego waiting for a cross of the 50 and enter a long position based upon the following:

-a closing price > 184.08, and
-the RSI(14) >50, and
-and ADX(14) DI+ and DI- cross.

When this occurs I will be taking a long equity position (along with the PNF charts below confirming).

Short term price targets? Short term would be a rise to the 50 day moving average. Based upon the current decline, I would expect price to rise above the 50 dma (which would normally be my short term buy signal anyway but I expect to be in early). Next target would be the 222-226 level (previous price support + 50% Fibonacci retracement level).


DJW PNF 1-box chart:



My custom designed short term trading chart. Last turned bearish on a price break below 234.

Still bearish but a price break >184 would turn this short term chart bullish. Watching closely.


DJW PNF Traditional chart:



Intermediate term chart. Turned bearish on a price print of 256. It has remained bearish since and has been an excellent guide through this decline. This is still one of the best charts I use to judge the intermediate direction of the markets.

Still bearish but a price print of 186 or greater would turn this chart bullish.


DJW 10 year weekly chart:



A reminder we remain within a long term bear market irrespective of any short term change in trend that might become prevalent over the next week (13 week EMA below 34 week EMA).

When pondering more "intermediate" price targets (other than the short term targets I mentioned above), note during the 2000-2003 bear market on both significant price declines price went from lows up to the 13 week exponential moving average (red line) before the decline resumed. Under the assumption that history repeats, it reasonable to project that the rise of this next short term rally (before the next decline) would be to this level. If so, based upon today’s price we could expect a rise to the 240'ish level (13 week EMA currently @ 243.63 and declining) in a bear market rally. If so, that would be an approximate 35% gain in equities and still remain within the confines of the bear market.

This is the sort of action I think is reasonable over the next 6 months.


DJW 3 year weekly candlestick chart:



In line with my previous potential price targets, I have put Fibonacci retracements on 2 declines; one from the top (321.07) and one from the start of the current decline (298.28). It is entirely reasonable to expect a retrace to at least the 50% level of the current decline (220.31) or even higher to the 61.8 level (243.39) and still be in a secular bear market decline. Note the 61.8 level corresponds with the 240'ish level I mentioned previous.

Ultimately I believe once we get a short term buy signal we will get to this price before the next decline. I intend to ride the wave up keeping in mind ultimately I expect another down leg that will exceed the current lows (and at least 5% BELOW the lows set in 2003.....perhaps even lower).

Bottom Line:

I have yet to confirm a technical buy signal. We are damn close and all my breadth indicator charts I track (over 20 of them) are all giving buy signals. That is the "foundation" of a potential rise but I need to see price action to confirm that we have entered a short-intermediate term bullish trend. As of Friday's close I have not. It may come next week.

There are times when the technicals are cloudy and times when they are clear. This is a time they appear to be clear in spite of all the weird price action over the past few weeks.

Based upon my daily line chart, the 1-box PNF and the Traditional PNF, they are all telling me a price close >186 will turn them all bullish. Should this occur I will be entering a long equity position in my provident fund account.

If/when this occurs, I will blog my changes.


As of today, my "strategic" positions remain as follows:

-100% BlackRock/MLIM US Dollar Cash Fund*

*(actual positions: USD cash 92%, equities 8%)


*percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).


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