Friday, January 04, 2008

Dow signals a recession: if it drops below 12,743

On November 21 the D-J Averages provided us with a bear signal, as the D-J Industrial Average confirmed the prior breakdown of the Transports. But bear signals are usually accompanied by surging volume, scary plunges, and fear selling. That didn't happen on November 21, and that had me wondering. The market continued down with the Averages hitting November lows of 4366.78 for the Transports and 12,743.44 for the Industrials.
Nothing is simple and mechanical in market analysis. Sometimes you have to use your instinct and your intuition and your grey matter. I was a bit taken aback by the lack of high volume and fear selling at the November 21 bear signal. After the bear signal, the Industrials lost only 56 points, taking the Dow down to its November 26 low. Such a minor loss following a bear signal seemed not only odd but suspicious. Therefore, I surmised, if this is really a bear market, the Averages should continue lower -- in fact, they should re-confirm the bear market by breaking below the next set of lows, the November lows.

Breaking to new lows would be doubly important, because the news was turning grim. The big banks were being hit by outrageous losses in subprime mortgages. The Financial Indices were falling apart. Warnings of hundreds of thousands of foreclosures were the talk of the town. Leading economists were warning of "a recession in 2008" and those warnings are still with us.

If all these ghastly events lay before us, then surely the bear market should continue and the Averages should dive to new lows below their November lows. And that still might happen. But you know something -- it hasn't happened.

I'm not a dreamer. I know what it will mean if the November lows are violated. It will be the market's forecast of tougher times ahead.

But what if the November lows hold? What if one or both Averages refuse to violate their November lows? I would take that as a sign that the stock market has discounted the worst. I would take it as an indication that the stock market has absorbed all the bad news and the bearish forecasts and has said, "We see the worst that lies ahead, and we've discounted it.

There isn't going to be any recession. The housing and banking situations may be bad but they will be managed."

Friday the Dow is 12,870

From: Dowtheory


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