One year ago today (July 18, 2006) the Dow Jones Industrial Average made a six-month low of 10,683.32. The date was significant because it launched one of the most impressive runs in the Dow’s history. The Dow set off on an impressive upward move with nary a correction until February 27 of this year when it dropped more than 400 points. That drop turned out to be a small blip as the Dow has since recovered and continued its upward march. The July 18 turn was relatively predictable as the Dow failed to take out the Jan. 20, 2006 low of 10,661, then rallied more than 100 points from the intra-day low to close at 10,799.23.
Yesterday, the last day of the yearly cycle beginning on July 18, 2006, the Dow surpassed 14,000 for the first time in history, meaning it gained more than 3,200 points in a 12-month time span.
No wonder there are people asking, ‘can this continue?’
One analyst who has his doubts is Garrett Jones. Jones sent out an alert to his customers and Futures’ Web readers regarding a possible turn. Jones, a technical analyst who specializes in market cycles, wrote, “My view is that the market is set to turn right away. With the date this Thursday (July 19), I am prepared for the market to reverse any time this week.”
He has written in Futures about the four-year president cycle that normally produces a low. That cycle was due in 2006, but a significant drawback never occurred. This anomaly occurred as well in 1986 only for a much more severe downturn to occur in 1987. Jones points out several similarities between 1987 and 2007 as well as the tendency for the market to experience its worst performance in years ending in the numeral 7. Coincidence? Maybe, but technical analysis has to do with the study of price movements.
Jones points out several other indicators of a possible major move including the obscure “Hindenburg omen”, which is believed to accurately signal a downward move.
While there are always market bears and the market has proven resilient in the face of both technical and fundamental signs of weakness, we are hearing from quite a few people regarding a major shift.
There are surely as many bulls though, and the problem of course is timing. Analysts were warning of an overheated market in the mid 1990s. They were right, of course, but most people following their advice lost money as the market continued to move higher until March of 2000. Perhaps the anecdote of traders balancing fear and greed is best exemplified during a possible blow-off top. The last move is often the most significant, making predicting a top a risky venture.
The best advice, as always, is to be diversified and manage your risk.
