I do want to step back and look at the much larger picture here for a couple of minutes and give you a little bit of food for thought. The index that I'm going to focus upon in the Dow Jones Industrial Average. The following chart is a monthly chart going back to 1900. Heading into 2000 I posted a piece in this column about how the Dow was approaching a typical target zone that I use for price projections. This helped time the original slow-down and turning point going into 2000. Well, using exact equal or measured move price points, what we can see in this chart is that in 2007 the Dow hit that target price even more exactly than just the zone I pointed out about 9 years ago. Amazingly, the price target using this strategy, which is based upon both price moves and pace or momentum, came within just a few points of an exact target despite the fact that this spans about 80 years.


At the 2007 International Traders Expo I gave an interview discussing the beginning of a larger market correction, but at the time I left room for the potential of a third highs to form on this yearly chart to created a momentum reversal pattern and had not initially anticipated as deep of a correction as we ended up with. This third high is still possible, using a triangle formation instead of a parallelogram at these highs, but the odds are less likely given the penetration of the 2002 low zone in the Dow and S&Ps.

Right now the more likely scenario is for longer time frame corrections through a trading range and long period of congestion. I would expect this to last at least as long as the 1960s-1980s trading range. Since the prices began to correct near the turn of the century, this would amount to about another 10 years before a third push higher similar to the one off the lows of the 1930s or beginning in the second half of the 1980s could take place. This is what I view as the "best case scenario" for the next half a century, since a push higher over the next 8-10 years would create that third high on the yearly time frames that would then favor an even larger multi-decade correction.


I had quite a debate with a friend of mine this evening who is in another area of finance and places a great deal of value in the fundamentals of a company and the valuation of a company itself, as well as the entire financial system regarding what would be more of a worst-case scenario before the Dow could recover. I proposed an extreme view whereby the potential exists of a larger multi-decade topping pattern forming with a two-wave rally (beginning in the 1930s), followed by a longer correction, and then a two-wave breakout. We see this a lot intraday in the markets and intraday. If this were to actually play out, it could lead to a correction in the Dow that could last up to 160 years. I know, 160 years... It seems quite extreme! If you were looking at this chart on an intraday time frame, however, that rally from the lows in the 1930s into this decade's highs could amount to 90 minutes, in which case a 3 hour congestion would certainly not seem at all unreasonable. The same strategies that play out intraday and the same techniques translate on all time frames, however, so just keep that in mind! Looking at a similar strategy in the S&P 500 it would mean a correction into about 2040-2050!

As my friend argued, there are a great deal of factors involved such as stocks being added and removed from the indices, as well as government actions, regulation, etc. that can potentially help the markets recover. I pointed out that many nations have arisen and fallen in lesser time, so there is certainly no surety that the Dow will survive, but this didn't go over with him very well. Let's assume, therefore, that it does. My stance in this particular hypothetical scenario is that we are actually charting human behavior and their response to differing stimuli and it doesn't matter what the underlying securities actually are. I explained that what we are seeing is a massive shift in confidence that will impact not only how individuals invest in their future, but also how other institutions invest that will be played out in the charts. In such a case, it would not be unreasonable to assume that it is going to change how the current generation of wage earners approach the markets. Do I think we will see a 160 year correction in the Dow and a 40-50 year correction in the S&P 500? Well, perhaps not, but it was fun to debate the possibilities. Even if this did end up the case, multi-year trends like we have seen since 2000 would still be fairly common within the much larger yearly range, so this alone would not really spell long-term disaster for those active in the markets.