Thursday

Stocks, Technical Analysis

Top Story March 2009: Dow Jones Goes below 7000

“The worst is over. We have bottomed and have turned the corner for now” - That is the word out there, and the media is using every excuse to generate a rally. The Inflationist believes otherwise. The FTSE rallied hard today on RBS’s “better than expected” losses of $27.7 billion USD. The worst in UK history. We are not trying to be too smart, but we just closed our Dow long position at 7400 as per Magik, ie the R1. Such rallies defying gravity and bad news are worth unloading your longs. We will anchor again as Dow goes back around 7250 to save us 150 points. Looking at previous chart morphology, we are concern that 7100 may not be the low. The gradient of the decline was not as acute as we had hoped for. Seemed very orderly. Looking at 7 July 08, we see a similar pattern when Dow was at 11100. It temporarily failed to break the 11000 mark. Rallied from 11100 to 11400 over 3-4 days, then broke lower the next 7 days to go to 10775-10850. Looking further back, we see most major declines share a steeper gradient before turning, and often is interrupted by a tiny blip up (failed rally) between these two declines.

The other reason we think the Dow will go sub-7000 is based on our theory: Mr Market loves round numbers. That is, it loves breaking (often slightly) below/above round numbers to take out the stops concentrated at that number. Reviewing all previous significant declines, the Dow have a habit of breaking through virgin round numbers, ie round numbers which have not been breached in prior declines.

It is impossible to quantify the drops once the mark is broken through. All we can say is 7000 is a nice mark to break. The Inflationist puts an order to open (long) for $5/point at 7250 (just in case we are wrong); $5/point at 6990; and $10/point at 6880. We see another turning point in 2 weeks time - and unless the Dow rockets convincingly between now and then above 7600, that turning point would fit nicely with our “sub-7000″ theory. So, watch what the Dow does over the next few days. If it breaks up convincingly, then we are most likely wrong. If it hangs around this range and trade range bound, get ready for more drops.

Knockout Punch we were expecting. We called for a 7275 turning point, and the low was 7240. Ideally, we would like the markets to close at 7275 to register a daily low on the chart. Now that it closed at 7365, we are still undecided if that fulfills our “knockout theory”. It is tempting for manipulators to push it lower on Monday to sub-7000. I know it sounds crazy to many to even entertain the idea of sub-7000 levels, but we need to be careful. Anything is possible and capital protection is key. Our entry level at 7950 looked low only a week ago. We foolishly held on, and now are compensating for it by our other profitable trades.

We will analyze the charts over the weekend. Our 7275 position is definitely not out of the woods. We will try to close $5/point (ie half) if markets go up Monday, and take some money off the table (this effectively lowers our effective entry point for our remaining $5/point long position). Monday could be the last flush down. So, if markets go up pre-open Monday (which indicates a down day as markets rarely move in one direction from pre-open to close - well, last night made an exception). By now we have been calling a bottom for 2 days. We expected markets to turn 19th Feb 2009 +/- few days. Shorting at this level is ridiculous in our views (although we said that 1000 points above current levels), and if you have a small losing position - hold it if you can take the pain to sub 7000. We are still hoping for markets to fall, which is our emotional-leverage indicator confirming that we are not over-leveraged.

We do not see any discrepancies at the moment. If you see any, feel free to enlighten us.

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