I told you last week that I would give you an update on the action now taking place with the Dow Jones and the Standard & Poor's indexes, and that is exactly what we are going to do.
The column today will be in four parts: First, I will give you a summary of where we are. Second, I will give you a summary of the forces at work in the market today. Third, I will give you my analysis of where I think we are going. And, finally, I will tell you how you can take advantage of the moves I see coming.
First — Where We Are
Let's first look at the Dow Jones index. You are all quite familiar with the huge rally that occurred in the 1995-2000 period. And you are equally familiar with the huge downdraft that occurred from 2000-2003 (by the way, that downdraft was an exact pullback of 50 percent of the huge five-year rally that ended in 2000).
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Now, if you will look below at the Dow Super Chart I have included with today's column, you can see a good part of the 1995-2000 rally and the entire downdraft.
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One of the more interesting features of the downdraft is that during the 2001-2002 period, the Dow struggled to climb above the Super Chart "keyline". Several times it did actually break above it briefly (both 2001 and 2002) before finally succumbing and moving down into the mid-7000 range on the chart.
Now, I would have you look also at the S&P Super Chart for the 2000-2003 period. Notice that each time the Dow breached above its keyline, the S&P DID NOT. True, it did pull up toward the keyline, but as the Dow breached above its keyline, the S&P was nowhere even close to a breach above its keyline.
Now, I want you to look at the activity on both charts since they both breached above their keyline's in mid-2003. Each chart has had at least four tries to cross below its Super Chart keyline and all attempts failed.
There was one attempt in 2004, two attempts in 2005, and one attempt in 2006. When the one in 2006 failed to cross below the keyline on both charts, it set off a rally not unlike the one that you can see occurred in 1998-1999 when an attempt to cross below the keyline there failed on both charts.
Note that the ensuing rally in 1998-1999 covered a total of 3000+ Dow points, almost an exact reproduction of the one we just finished from 11,000 Dow to nearly the 14,000 Dow. But, note also this event — that the S&P rally, which covered 500 points in the 1998-1999 rally has only covered 300 points in the current rally.
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This is of special interest in analyzing where we are at the moment, because the current rally took the Dow Jones price to the 13,635 level as of this week. This is a new all time high.
The cross above the old 2000 Dow high of about 11,760 occurred the week of October 6, 2006. But now, note that the S&P has yet to break above its old 2000 high. It is here that the most important part of where we are is seen. To not break the old S&P high after breaking the old Dow high suggests that the market is still at a vital crossroad.
Chartists would say that the S&P has not yet confirmed the Dow action.
To a chartist, that is an important factor. Confirmation is a needed event just now.
Second — Forces At Work Today
Now, remember that the Dow represents only 30 of the biggest and best of the New York Stock Exchange. It also represents about 40 percent of the total trading volume of the Exchange.
Hedge funds, mutual funds, and really big investors tend to go to the Dow group before they go to lesser stocks because if it is "liquid" (easy to buy and sell big blocks of stock) and because it is a worldwide investment keystone.
It is this liquidity and high visibility worldwide that has attracted investors and driven the Dow to new highs. But, the S&P has not yet gotten this same investing attention and until it does, the current rally remains suspect. It remains much harder for a total of 500 stocks to gain attention than just 30 giants.
Somewhere in this mix, these huge investors are going to be required to make a decision that will determine the outcome of the next 3-4 years of trading. This decision is, in my view, not that far away and will be signaled by a new all-time high in the S&P.
The old S&P 2000 high was approximately 1540. Currently we are flirting with this level (in the 1530 area now) and because we have not yet broken decisively above the 1540, a lot of investors are nervous.
This nervousness has even prompted some of the big brokerage houses into a "sell" mode — see my recent article on the Morgan Stanley "full house sell" signal, for example. (Go here for the archive of the article).
Now, so that you can be well armed while this battle rages, I have marked out the key supports on both the Dow and S&P for you to study. There are three support levels on the Dow Super Chart and four supports on the S&P Super Chart.
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The Dow supports are as follows: Near-term support at 12,760. This represents that first level at which a real test of the Dow chart would occur. It does not mean that we will see such a test, just that this is the first level at which a true test will occur if it happens. At the moment, we are just a tad less than 900 points above that level — quite a cushion I would say.
The second Dow support occurs at 12,050, about 1,600 points below the current level. This level only becomes important if the 12,760 level were to break. So far, I consider that a very unlikely event. BUT, be alert to this possibility, as the likelihood of breaking the 12,760 level does represent a 20 percent possibility today.
(Remember that charting is a percentage business. There is always a possibility a highly favored signal will not work out. But, generally —75-80 percent of the time — formation predictions do work out!)
The last key support on the Dow is the one I call the Major Market Turnaround support. If it were to break it would mean that the market as a whole has made a critical turnaround and the possibility of seeing a 15-30 percent decline is now very real. At the moment, this is only about an 8 percent possibility, so of little concern to you or me.
Interestingly, the S&P supports show an extra support between the secondary and the Major Market Turnaround level. It just gives us an extra level that might be used later if the S&P secondary support failed.
For the record, the S&P levels are: Near-term 1455. The current S&P level of 1530 or so is about 80 points above this near-term support, not a lot, but quite sufficient for our current needs. The secondary S&P support is at 1385. The third support (the extra one) is at 1355 and the Major Market Turnaround level is at 1325, nearly 200 points below our current S&P price. Keep these levels in mind, because I am about to tackle the forecast, as I see it, for the next 3-5 months.
Now, the real key to the testing battle going on today is currently taking place in the bond market as it tests its own supports. Last week, I gave you my thoughts on the bond market and told you I believe the bond market guys have it all wrong.
I do believe that the bond market will be in for some serious testing the next month or so, but I believe that the resolution of that test will be to see bond prices go higher. With that prediction, let's look at our third segment of our column, Whitmore's predictions.
Third — Whitmore's Prediction of Where We Are Going
I sent out a column on May 17 that predicted what I believe will be a super boom that will cover the next 3-4 years (Go here for this article, too). The key to the beginning of this boom will, I believe, be worked out over the next 60-90 days.
At the moment, the bonds just took a nosedive in price. But the Dow and S&P have held up quite well in the face of this sell off in bonds. However, I believe that the real test will now be to see if bond futures prices can break above the 109 level (the current futures contract is the September contract. A chart of these bonds was part of last week's column, if you want to look it up in the archives).
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We are currently at the 107 level after a very fast test of the 104 level on June 13. I expect that we might move just a tad higher and then again test the lower levels, but I don't expect that we will break much below the 106 level again.
That said, I believe that the S&P and Dow investors will soon see that the bond market is starting to settle down and will get back to the stock market matter at hand, that is, breaking the old S&P high at about 1540.
I do expect that this level will be breached above by about the 4th of July holiday or shortly after it. If it isn't, we might then see a minor sell off in stocks. But again, none that will break the near-term supports, in my estimation. I expect that the S&P will then go to as high as 1580-1600 on the initial breach of the old 2000 S&P 1540 high.
From there, a pullback to the 1520 area might well unfold. But after this pullback, I expect that we will not break the Super Chart keyline until we first see the 19,000 area on the Dow and about the 2100 area on the S&P. Now, if that isn't a super boom, I don't know what is.
Finally — How Do You Take Advantage Of The Super Boom?
Okay, all the supports are laid out for you and the predictions have been made. Now, just how do you take advantage of all this coming action? Well, first you keep an eye on the support levels I outlined for you at all times.
This is a percentage business, as I said above, and we are never in a 100 percent guarantee position. If supports break, it may be wise to lighten up on investments until the outcome is clear. Again, if lowering investment levels after a key break does seem appropriate, I will see you know that information at once.
Second, the best way to take advantage of the rally is to seek out some of the good index ETF funds that mirror the Dow and S&P and invest in them. The ETFs are best because they can be sold without mutual fund entry or exit fees.
And since we are talking about a 3-4 year period, the fewer the fees, the better. I recommend that you use discount broker's to make your buys and sells, as this keeps the acquisition costs to a minimum.
Lastly, if you must buy individual stocks, stay with the Dow group or the much larger companies in the S&P group. Again, liquidity is paramount and the ability to be flexible in adjusting portfolios must be right up there with this number one liquidity consideration.
Well, that's about it for this week. Hope you find that the above helps you approach the market in a well studied and risk reducing way. If you still have any questions about the charts or supports, you can send me an e-mail through NewsMax and I will do my best to get an answer back to you.
So for now, I hope your coming investing week is a good one. In the meantime, you keep in touch. I do! See you next week.
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