Mike's CrystalBall

1987 DJIA Incomplete B.A.R.F.

Here is another classic bump and run formation from 1987. You can see how the price was traveling through a defined channel. At the start of 1987 there was some exuberance which caused a deviation way above the existing channel. This BARF did not complete as it reverted back into the primary trend channel.

The 2000 Nasdaq Market B.A.R.F. was different in that the primary trend line was broken. When the primary trend line is broken, then the price will go much lower.
 

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Looking at Asia right now and everything appears in the green (so far). Its early on in the trading session though and anything can happen. The Chinese raised their interest rates and this might weigh on the Hang Seng and the Shanghai Composite.

Building Permits/starts will be coming on the 20th. All reports in this market environment are somewhat important. So this will be an important report and might flip the markets one way or the other. Due to the heavy negative sentiment on housing right now, this report will have to be extremely negative to move the markets. On the other hand, any positiveness from this report will send the market in the other direction.

"Building permits" is part of the leading indicators. The leading indicators has signaled possible recessions in the past. Thus, building permits will be somewhat important.

They are expecting a small increase in housing starts (from last report) and a small decrese in permits. For some reason, I dont believe that housing starts will be increasing. There were so many conference calls that I listened to and followed on homebuilders. I wouldnt expect an increase in starts.

Now I would like to introduce you to my own personal fear meter. The personal fear meter is basically a question:

"Would it churn your stomach to go long in any of the DJIA components?"

I would be "sick to my stomach" in going long in any of the components. This same feeling developed during 2006, but not until June/July. It was a slow bleed that occurred as the Summer swoon progressed.

This is a contrary indicator though. When I feel most sickly of going long and dont want to look at the components, then this means there is probably a rally just about to happen.

I suspect there will be a mild panic before the FOMC meeting where everyone is going to expect the worst outcome from Bernanke and Company. Hopefully, the meeting will bring more certainty.

If everything goes well tonight in Asia and then in Europe in the morning, I suspect Monday will have a positive (but not a convincing) bias. Then Tuesday will be tossed around by the housing permits/starts and then Weds will be filled with panic before the actual Fed meeting.

In the past, good news from the Fed meeting led the market higher. The Fed meeting in June of 2006 proved to be a turning point. Imagine what would happen if they said a nice interest rate cut was in order? However, my suspicion is for them to hold throughout the year.

One thing to note is that Democrat politicians (Clinton especially) are using the stock market correction as a weapon against the Republicans. If Bernanke and Company are the slightest bit Republican, then they would be more incline to cut rates. This seems logical since we are on the eve of a Presidential election. It will look bad for the Republicans if a recession and stock market panic is how George Bush ends his Presidency.

In fact, there would be no doubt in my mind to vote for a Democrat because I would not enjoy another repeat of the Bush presidency. Two recessions and two stock market panics/crashes in one Presidency? and a war to boot? Personally, I didnt like either Kerry or Gore, but I do know that if either were in office right now then 3200 more soldiers would be alive today...
 
http://www.iseoptions.com/marketplace/statistics/isee_history.asp

I have a theory on the ISEE sentiment #. In October 2002, the sentiment had reached very bearish lows and then in December there was a super euphoric high as the market realized that was finally at a bottom. Then there were bearish lows in March 2003 followed by the Great Rally of 2003 where the Nasdaq lifted up from 1500 to 2000.

There were bearish lows in September of 2006. Then the sentiment index bounced up and has hit a double-bottom.

Study the sentiment chart closely. . . If the sentiment line trends up, then that is bullish for the market. If the sentiment line trends down, then you can count on a correction. Since we are at the bottom, the only way it can go is up from here.

I believe the rest of 2007 will be pretty good. . .
 
The Wilshire 5000 is appearing very healthy. The selloff yesterday was on lower volume then the 3 days of gains preceeding it.

Notice how the correction takes on a U structure. I would expect a pullback of at least 1/3 of the height of that structure of at least 230 points on the Wilshire before moving upward. The pullback should be on lower volume then the days before it.

However, it appears the Wilshire 5000 respected the 50 day moving average line which is indeed a bullish sign.

The Iranian news seemed like big news. However, a review of cnn.com, msnbc.com and foxnews.com suggest to myself that this Iranian news is not at the top of their reporting list. I dont see news of the Iranians firing on a US Navy ship anywhere on the top pages of those sites. Wouldnt such a confrontation be right up in big letters on the front page? So this news seems like just a rumor that was started and will probably pass.

In my crystalball, I see that the indexes will probably pullback a little which would be healthy for this U formation. The pullback should be on lower volume. I see heavy support at the 50 day moving average. The main concern I have is that if the Wilshire finishes under the 50 day moving average. The concern is that the 50 day moving average would turn from support to resistance.

The futures are looking ugly right now. Asia and Europe in the red, but not descively so. There will be a healthy pullback followed by an advance in the coming days. Lets see what happens...
 

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The DJIA just blasted through a key point. If it goes through 12267 then start being afraid. If it makes it through that point, then it will test even lower to the old lows. Lets hope it stays right here.
 
This chart of the Wilshire 5000 says it all. The recent up-move from the U formation was strong, but the pullback was weak (when looking at the ADX). The A/D line suggests no distribution. Market players had decided to buy this dip, there was no distribution. The ULT suggests a small-pullback is in order though.

I say we pullback a little bit and then accelerate full-speed forward.

Now lets compare the ISEE sentiment indicators from different points of time. Here are different trends from different points in time. I dont have to put up complex charts to tell you that it was a great time to buy in October 2002 and September 2006. I can tell you that 2002 and 2006 represented pyschologically challenging times to buy.

In 2002, I was scared of the market. In September 2006 I was also very scared as well. Each time I was very scared represented a great time to buy. This, however, is not always the case. In 2000 when stocks started coming down, it was very scary. In 2001, it became even scarier. In 2002, it was the scariest and I wondered if I would ever go near the market again.

Fear doesnt neccasarily mean that we should buy the market. However, we should look at the charts and ask ourselves what is happening. When comparing past manias, crashes and panics, this is not a chart that would indicate to me that there is any type of mania, crash or panic taking place. Clearly we are moving up a primary trend line and experiencing different pullbacks and corrections.

From 1999 to 2000, the Nasdaq had doubled in price. This suggests a mania that had taken place. Now with any such mania usually comes crashes and panics. When looking at the total market, we are only up 17% since July of 2006. Its a strong advance, but hardly a mania.

Looking at the news websites and watching CNBC, we see people every hour on the hour come on and tell us about recession, correction and economic problems. We see hostages and threats to our energy supply. One has to think that a lot of this wall of worry is already priced into stocks. In 2000, I did not see quite the parade of naysayers on television or on websites telling us the world will end.

I say we go higher from here.

Current situation (10 day moving averages)
118
3/30/2007

118
3/29/2007

118
3/28/2007

117
3/27/2007

114
3/26/2007

109
3/23/2007

105
3/22/2007

99
3/21/2007

95
3/20/2007

91
3/19/2007

87
3/16/2007

87
3/15/2007

87
3/14/2007

89
3/13/2007

91
3/12/2007

90
3/9/2007

93
3/8/2007

99
3/7/2007

104
3/6/2007

107
3/5/2007

114
3/2/2007

117
3/1/2007

118
2/28/2007

120
2/27/2007

121
2/26/2007

123
2/23/2007

124
2/22/2007

124
2/21/2007

126
2/20/2007


September 2006 situation

114
10/11/2006

114
10/10/2006

111
10/9/2006

114
10/6/2006

116
10/5/2006

116
10/4/2006

114
10/3/2006

112
10/2/2006

108
9/29/2006

107
9/28/2006

108
9/27/2006

108
9/26/2006

107
9/25/2006

102
9/22/2006

102
9/21/2006

98
9/20/2006

99
9/19/2006

96
9/18/2006

95
9/15/2006

108
9/14/2006

106
9/13/2006

110
9/12/2006

110
9/11/2006

115
9/8/2006

114
9/7/2006

120
9/6/2006


October 2002
115
11/11/2002

114
11/8/2002

109
11/7/2002

109
11/6/2002

111
11/5/2002

108
11/4/2002

107
11/1/2002

104
10/31/2002

104
10/30/2002

102
10/29/2002

100
10/28/2002

96
10/25/2002

94
10/24/2002

94
10/23/2002

91
10/22/2002

92
10/21/2002

91
10/18/2002

93
10/17/2002

92
10/16/2002

94
10/15/2002

93
10/14/2002

99
10/11/2002

101
10/10/2002

100
10/9/2002

99
10/8/2002

101
10/7/2002

101
10/4/2002

99
10/3/2002

99
10/2/2002

99
10/1/2002
 

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No chance for a down day. The market moves in a certain way. Iranian hostages, recession, housing crashes etc. are not reasons why the market moves down. The market moves down based on sentiment and the charts.

So with that said, the ISEE 10 day moving average has to be trending downwards for me to turn negative on the market. The 10 day moving average will have to get to 140 and then turn around for me to say head for the hills.

Stocks are cheap now, time to go long the IWM.

Quote from diligent:

i see a down day tomorrow, in my crystal ball.
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