This trading week so far has been an absolute disaster for long-only investors.  Let’s take a look at the current Dow Jones structure and see if we can pick up any clues on what might be in store next.

Dow Jones Monthly:

As of this writing, there’s still an hour left in this trading week but I wanted to give a quick update.  It looks so far like we’ll get a higher close today but anything can happen in the final hour (UPDATE - should have waited that extra hour before posting - the Dow rallied 500 points into the close).

The main thing to take away from this chart - beyond how far and fast we’ve fallen - is that the monthly 20 and 50 EMAs are completing a bearish ‘death cross’ of sorts, a similar occurrence as what happened in late 2003.  It didn’t pay then to get aggressively, manically short the market at that seemingly most bearish development then, but past may not always be prologue especially in this environment.

From a percentage basis, the Dow Jones actually held up quite well (showed relative strength) against the S&P 500 and of course the NASDAQ during the 2000-2003 bear market.  Unfortunately, all three major US Equity Indexes are being slammed roughly equally in this environment.

Notice also that the MACD oscillator is registering a new momentum low near -2,000, meaning the 3 and 10 monthly EMA differential is negative 2,000 “Dow Points.”  That’s stunning and is a new numerical low not seen in the Dow’s history.

Let’s drop the perspective to the Weekly chart where I can discuss a potential Elliott Wave pattern that is near identical to that of the S&P 500.

Dow Jones Weekly (with Elliott Count):

For more detailed analysis, see my similar post “Possible Elliott Wave Interpretation for the S&P 500” which shows a near mirror structure.

It looks like we’re completing (or in) sub-wave 5 of the particularly bloody Wave 3 Down which all may be part of a larger ABC correction (on the Monthly charts).  If this is the case, then we could expect a Wave 4 to take us to around Dow 10,000 into the new year before heading lower - that is IF that is the proper Elliott interpretation.

Many 5th waves (in this case a fractal 5th wave) form on positive momentum divergences, which is what we may be seeing develop here.  Of course, I need not say what could occur after a possible Wave 4 completes itself perhaps early to mid 2009 but we’ll take the market week by week and day by day until then.

Adam Hewison of the Market Club released a video this morning that I wanted to share with you - in fact, it inspired this post.  Adam’s video “How Low can the Dow go?” discusses current ‘trade triangle’ signals, commentary, and a possible projection of which to be aware. Market Club members receive such videos and more as they are released.

I wanted to share a little bit of “Hewison wisdom:”

“An investor’s goal should be to capture 70% of a move. The middle is the sweet spot, and if you make enough in the middle then who cares about the tops and bottoms. Forget picking up the 15% on the top and 15% on the bottom, it doesn’t work consistently to use it as a trading strategy.”

“The key in trading is not to get out at the top, or in at the bottom. Anyone who tells you to do that isn’t playing smart in the markets, and most likely claims that they are holding the ‘holy grail’ of trading.”

I can’t tell you how many times I’ve been disgusted with the “TV People” constantly asking each other, “So, are we at the bottom?!”  But that’s a whole other story.

Capital Preservation must be your #1 goal in this environment.