Just How Low Can the Dow Jones Go
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.
Cory, my count is the same as yours. My chart shows the current wave 5 is an expanding diagonal, which started on Nov. 4 and possibly completed intrady today. If so wave (4) started today. Do you agree with my observation?
If you go deeper say to the 15 or 30 min frame, I would agree that fractal 5 completed I think actually the minute I posted this blog because the market surged strongly afterward. It would make sense that 5 would be ending in this vicinity which would complete the monsterous wave 3 impulse down which will be a relief. Let’s see how next week’s action trades but if indeed fractal 5 completed, we can go ahead and buy in here and place stops beneath today’s intraday lows for a major reward/risk relationship provide 4 does take us up to around 10,000 or just beyond (but not into Wave 1 territory).
Thanks. Wave 3 was very sharp. It makes sense wave 5 is shorter or a failure. Hope after wave (4), the wave (5) is a failure. If wave (5) goes down too deep, the expanded flat ABC may not work. Maybe wishful thinking. This bear market is unusual. Not many people have experience with this type of market. Warren Buffet was only a kid in 1929.
Yes, and unfortunately, Buffett (or at least his stock) is taking it hard on the chin. Berkshire stood at $145,000 per share in September and just yesterday, dipped below $80,000, losing almost half its value in two months.
Your thought prompted me to post on the potential structure of the current Fractal 5 on the 60-min chart. Check it out and see if you’d like me to add any insight or anything. I’m just trying to use basic Elliott rules as I understand them and not get too fancy with it. I so surprised at how effective Elliott is at times – I mean textbook-patterns playing out. Fascinating.
Yes, I saw your update. For a normal five wave impulse, wave four can not overlap with wave 1. But my observation is that this wave 5 of (3) is an “expanding diagonal” which appears as wave 5 of an impulse or a wave C of a zigzag or a flat, per Robert Prechter. in an expanding diagonal, wave four must overlap with wave 1.
Upon closer inspection, you’re 100% correct and I missed the classification of this impulse as an expanding diagonal which is clear once you know what to look for. It’s amazing how accurately this structure follows that of Prechter’s work and basic … or slightly intermediate … concepts in EWT.
Since wave 5 of (3) is an expanding diagonal, if it did complete today, we will have a sharp rally. Wave (4) will retrace back to DJI 9500 area, the end of wave 4 of wave (3), per Prechter’s guidance.
An alternative count is that this expanding diagonal is only wave one of wave 5 of (3).
There may be some other ways to count. So I will watch carefully next week. If the market continues to rally, it confirms wave (3) have completed.
Corey,
Just checked in on your site after “losing” it from a computer crash. I enjoy your commentary and thank you for the detailed approach you take. Through my analysis, Friday I have taken a long YM @7560 2lots on a swing hold trade with my stop at 7380. I feel better about this position after reviewing you post:) Thanks again for the great work.
what do you think of today’s market? 12/01/08