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A happy, healthy and prosperous New Year to all of you!
And yes, I might add, we would like it to get better. So true – but we do have to take what the market dishes out. I did contemplate over the last couple of weeks that many of my 'bear' friends would have been having a ‘field day’ over the last month or so. I hope that they were right and made a heap of money.
This is that time of the year Scollon goes out on a limb and offers his scalp – at least potentially.
This week I am going to start off with the big picture, and that can only mean one thing – yes the DOW. I hear many say that with only 30 stocks the DOW is unrepresentative and all that, but after this recent rort you would have to say it is one sharp weather barometer.
So where to for the DOW in 2008? This involves looking at the big picture and standing back from the current market gloom. As I mentioned late last year, it is possible that the US is in recession and does not know it (and may not till some time after official figures are released).
Before we go to the chart there are a number of matters to consider:
How deep might the US woes be? (Note I have used ‘woes’ rather than ‘recession’ as the illness can continue without there being a recession.)
Can other economies largely ‘decouple’? In particular China and India?
Is there likely to be further impact of the credit crunch on sectors other than Financials and Property and will it spread into an increasing number of markets?
Can the US Fed manage a crisis adroitly?
What are the ‘X’ factors, especially the geo-political such as the Middle East?
What impact might the US elections have on finance markets?
I do not want to dwell on the ‘fundamental’ issues but it is useful to set the backdrop.
Now to the charts. Firstly take a look at the daily chart:
click chart for more detail
This is a 150-day Elliott Wave chart that displays a classical downward Wave Five pattern. On a line chart the second Wave Five has not been hit, but on a bar chart it has. We know the first Wave Five is a high probability and that the second is less likely. The possibility of a third Wave Five is even more remote, although the possibility is there.
The next chart is a 30 week:
click chart for more detail
The chart indicates that the reversal we saw on the DOW last Thursday could be short-lived and that there is a bigger and blacker hole – somewhere around 12,000. This is more or less consistent with the possibility in the first chart of a lower Wave Five.
The next chart is a 30 month Elliott:
click chart for more detail
This also indicates there is a possibility of a pullback to 12,000 but with an upside of 15,000. But take a look at the upside timeframe on the horizontal axis – around 2012! That’s not much use to anyone.
What is interesting is that the Wave Four bands indicate that it may not complete till well into 2009. Which means we could be locked into these levels for a year!
The charts are indicating that there is not a lot of upside. It’s more likely that we’ll see extensive range trading and, at times, volatility.
Things can change, as we know, but right now it does not look like a champagne year for the DOW! This is not to say that money can’t be made or that other markets will necessarily follow a similar pattern. In the coming weeks we will turn our view to some of these other markets.
Enjoy the ride
Tom Scollon
Chief Analyst
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