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It has been a dramatic few weeks on global stock markets. The impact of the credit crunch and years of easy debt, that is simply not available now, is really starting to hit home. The herd is heading for the hills and any buying now is fraught with danger. I did say all through 2007 that the final part of 2007 would see the end of the bull market and that it would be a time to harvest your profits from the long side.
Aaron Lynch and I were in the U.S. in September of 2007 and suggested to students to watch for a top in mid-October. The question that soon followed was, “How far do you think it will fall?”. The answer we offered left most of the room a little stunned, but now it may seem more real. I’ll share a little with you now.
Chart 1 is the daily bar chart of the Dow from 2002 until present and takes in a full view of the bull market.
Chart 1 – Dow Jones Futures (DJ-SpotV) Daily Bar Chart
click chart for more detail
The bull market was basically 5 years to the day, from bottom to top. The futures market low was October 10, 2002 (7,180) and the top October 11, 2006 (14,270), giving a range 7,090. As I have mentioned in previous articles, the top was basically double the low.
Looking at a 50% retracement or mid point of this bull range, you get potential support around 10,725. Looking across Chart 1 you can see where I have highlighted a bunch of significant old tops and bottoms around this price, which adds to this area being potential future support.
The next calculation that also points to this 10,700 to 10,800 area for support relates back to the price of the low in October 2000 (7,180). While the bull market top is close enough for me to twice the low, looking at 150% of the low we get 10,770 as potential price pressure. Putting the 50% retracement, old tops and bottoms and the 150% of the low all together, there is strong argument for support near these levels.
I have some views on a time frame for this to occur which is beyond the scope of what I’m going to cover here, but at this rate 10,800 is not that far away. It seemed like a horrible proposition when I put it to our U.S. clients in 2007, now it is very much a real possibility. I only hope that many of our Safety in the Market clients took caution late in 2007 with their investments and have weathered this storm well. I know for myself and at least a few others, that there have also been terrific profits being made on the short side.
Until next time…
Noel Campbell
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