Posts Tagged ‘Long-Term Investment’
The Dow Theory: Part II
This article will start by mentioning some of the shortcomings of the Dow Theory, which is explained in detail in: My First Post Examining Dow Theory. For example, the Dow Theory, on average, might miss around 20 to 25% of a move before generating a signal identifying it. For many traders this is too late. A Dow Theory buy signal usually occurs in the second phase of an uptrend as the price penetrates a previous intermediate peak. This is about where most of the trend following technical systems begin to identify the existing trends.
There is never a time when the Dow Theory does not lend itself to presumptions as to questions concerning the direction of the primary trend, because this is an area that is highly prone to misjudgment, particularly at the beginning of each major trend and ensuing for a short time after when the answer given by Dow will usually be prove wrong. There will be a certain time then when the Primary Trend will be up according to Dow, but analysts may advise not to invest at that stage because the looks of the trend are showing on the trend being diminished somewhat and the smart investor better stay out, and the one who is already invested may wish to opt out at this point, being that there is a larger chance that the trend will fail.
However as you see in the Chart below, one can do pretty nicely for himself over the years if he buys and sells only of Dow Theory signals:
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The S and P 500 Showing a Major Topping Pattern
If you look to the Chart below you will see most evidently the major top I speak of. It is a Head and Shoulders top like the one in my US Dollar Index article’s Daily Chart. But this is on the Weekly Chart and therefore shows longer term patterns. This top is considered a long term major top and may play this role for some months to come. The target to fulfill the pattern may be below 950 point for the S and P 500 Index and may well spell the beginning of a long term downwards cycle for the world’s financial markets.
This is the way the Chart looks:
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A Market Forecast That Says ‘Take Cover’
With the stock market lurching again, plenty of investors are nervous, and some are downright bearish. Then there’s Robert Prechter, the market forecaster and social theorist, who is in another league entirely.
Mr. Prechter is convinced that we have entered a market decline of staggering proportions — perhaps the biggest of the last 300 years. In a series of phone conversations and e-mail exchanges last week, he said that no other forecaster was likely to accept his reasoning, which is based on his version of the Elliott Wave theory — a technical approach to market analysis that he embraces with evangelical fervor.
Originating in the writings of Ralph Nelson Elliott, an obscure accountant who found repetitive patterns, or “fractals,” in the stock market of the 1930s and -40s, the theory suggests that an epic downswing is under way, Mr. Prechter said. But he argued that even skeptical investors should take his advice seriously.
“I’m saying: ‘Winter is coming. Buy a coat,’ ” he said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”
His advice: individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever,” he said.
Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009 or the worst years of the Great Depression or the Panic of 1873, he predicted.
For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grand kids many years from now, ‘Don’t touch stocks.’ ”
The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”
Mr. Prechter is hardly the only market hand to advocate prudence now, but nearly everyone else foresees a much rosier future, once current difficulties are past.
For example, Ralph J. Acampora, a market analyst with more than 40 years of experience, said he moved entirely out of stocks and into cash late last month. Now a partner at Alverita, a wealth management firm in New York, he said recent setbacks suggested that the market would drop another 10 or 15 percent, probably until September or October, before resuming another “meaningful rally.”
Over the next several years Mr. Acampora expects an “old normal market,” characterized by relatively short-lived swings that will provide many opportunities for smart investors — one that resembles the markets of the 1960s and 70s. “I’ve lived through it,” he said.
Like Mr. Prechter, he is a past president of the Market Technicians Association, the leading organization of technical market analysts, and he said that his colleague has done “some very good work.” But Mr. Acampora doesn’t agree with Mr. Prechter’s long-term theories, either intellectually or emotionally.
The “mathematics don’t work,” Mr. Acampora said, because such a big decline would imply that individual stocks would need to trade at unrealistically low levels. Furthermore, he said, “I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans, because it’s all over.”
Still, on a “near-term” basis, he said, “We’re probably saying the same thing.”
Similarly, Larry Berman, who co-founded ETF Capital Management in Toronto and recently ended his term as the president of the technicians association, says he sees a “classic” short-term negative market trend developing now. But he doesn’t use the Elliott Wave theory, saying Mr. Prechter is trying to “measure the market in decades, which is too long a time frame for practical trading purposes or for risk management.”
Mr. Prechter, 61, lives in Gainesville, Ga., where he runs Elliott Wave International, a forecasting and publishing firm. He graduated from Yale as a psychology major in 1971,dabbled as a singer, drummer and songwriter in a rock band and became a technical analyst for Merrill Lynch.
He became fascinated by Mr. Elliott’s writings, which suggest that the market moves in predictable if complex patterns. Along with A. J. Frost, Mr. Prechter wrote “Elliott Wave Principle,” a 1978 book that predicted the emergence of a great bull market — a forecast that was largely fulfilled. By 1987, he was widely regarded as an expert in technical analysis. Articles in The New York Times said he was known as “the market’s leading technical guru” — and more. An article in October that year said he had “emerged as both prophet and deity, an adviser whose advice reaches so many investors that he tends to pull the market the way he has predicted it will move.”
He has far less day-to-day influence now, after years spent developing a theory he calls “socionomics,” which holds “social moods” as the cause not only of market cycles but also of economic and political events. A grand cycle is ending, he says, and the time for reckoning is near.
In 2002, he published “Conquer the Crash,” which predicted misery ahead. Even so, he said in 2008 that the market would soon rally sharply — then said late last year that stocks were about to fall and that the great decline would resume.
Since 1980, the advice in his investing newsletters, when converted into a portfolio, has slightly underperformed the overall stock market but has been much less risky, losing money in only one calendar year, according to calculations by The Hulbert Financial Digest. Mr. Prechter said he disagreed with the methodology used in these measurements, but offered none of his own.
For his part, Mr. Acampora says that the Elliott Wave has some validity as an indicator but that “it’s only part of the story” of technical market analysis, which also needs to be buttressed by economic and fundamental research.
Mr. Prechter says his unifying theory, socionomics, is a “young science.”
“We’re quantifying it,” he said. “We’re working on it.” In the meantime, he contends, it has enabled him to “look around the corner” and prepare for a dangerous future.
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The Dow Theory: Part I
The Dow Theory is a major corner stone of Technical Analysis. It is one of the oldest and best known methods used to determine the major trend of stock prices. It was derived from the writings of Charles H. Dow as published in the newspaper he founded, “The Wall Street Journal”. It was later refined further by analysts and writers during the first few decades of the 20th century.
Seven Basic Principles of Dow’s Theory:
The Dow Jones Industrial Average and the Dow Jones Transportation Average reflect all information, experience, knowledge, opinions and activities of all stock market investors. Therefore, everything that could possibly affect the demand for or supply of stocks is not worthy of consideration.
There are 3 trends in stock prices. The Primary Tide is the major long-term trend. But no trend moves in a straight line for long, and therefore there come up Secondary Reactions in the form of intermediate-term corrections that interrupt and move in an opposite direction against the Primary Tide. Within these are Ripples, or minor day-to-day fluctuations that are or concern only to short-term traders and not Dow Theorists at all.
When the Primary Tide is upward pointing, this is also known as a “Bull Market”, there are usually three upwards pushes in stock prices. The first move up is the result of far-sighted investors accumulating stocks at a time when business is slow but anticipated to improve. The second move up is a result of investors buying stocks in reaction to improved fundamental business conditions and increasing corporate earnings. The final upwards push occurs when the general public finally notices that all the financial news is good. During this move there is usually rampant speculation seen.
When the Primary Tide is downward pointing, this is also known as a “Bear Market”, there are usually three downwards pushes in stock prices. The first push down occurs when far-sighted investors sell based on their experienced judgment that high valuations and booming corporate earnings are unsustainable. The second move down reflects panic as a now fearful public dumps at any price the same stock they just recently bought at much higher prices. The final push down results from distress selling and the need to raise cash.
The two Averages must confirm each other. To signal a Primary Tide Bull Market major trend, both Averages must rise above the latest highs made by their previous Secondary Reactions. To signal a Primary Tide Bear Market major trend, both the DJIA and DJTA must drop below their last Secondary Reaction lows. One average meeting these conditions alone in meaningless, but it is not uncommon for one Average to signal a change in trend before the other, with no set time limit as to when the second Average gives the trend confirmation.
Only end-of-day, closing prices on the Averages are considered. Intra-day price movements are ignored.
The end of a Primary Tide is confirmed only after being signaled by both Averages.
The next article will focus on some of the shortcomings of this Historic Theory.
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Japan’s Upswing May End Soon
Japan’s stock market appears to be at a decisive point, one that will determine whether 3-month up-cycle that has remained in place will continue. Notes, technical indicators are giving bearish signals, with Nikkei having fallen below its 52-week moving average and 100-day advance/decline ratio dipping below 95%, pointing to possibility that Japanese shares could remain weak through September. In Today’s trading, the Nikkei Index dipped down to 9378.23, down below its’ previous inter-day 2010 low. This is a critical technical development to watch as going forward with Japanese equity investment.
New Prime Minister Naoto Kan will be judged depending on whether he can rein in finances and promote economic growth, promises unfulfilled by predecessor Yukio Hatoyama. Both Nikkei and Topix both lost over 7.0% during Hatoyama government. Investors see Kan as advocate for weaker yen, often viewed as positive for Japan’s export-oriented market. It would hardly be surprising if Kan envisioned a scenario in which a weaker yen pushed stock prices higher. But analysts say equity market recovery is unlikely unless Kan implements credible policies to lift the broader economy.
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America’s Retail Markets: Part IV
Since our last installment of this series, Gymboree, a Physical Fitness retail company and one of the largest in its’ field, has stopped the daily downtrend it was in and established technically what was looking as a weekly and even monthly upwards trend (see charts below). It has hit the Bollinger Bands upper bounds, a sign of excess power that needs respite, and has this week bounced off the fresh trend-line that is both weekly and monthly, successfully.
The RSI is in a good intermediate territory. The ATR, or Average True Range, shows the true ranging of prices across the time line and an upswing in the making. When the ATR heads in an upwards direction, as is the case now, this foretells a good upswing in the making.
We intend to bring you a fifth part to this series, examining the Economic view of the Retail market as it stands to date. What this segment means to the US Economy and the world as a whole, and dissect technically some Market Sector ETFs from the US Retail Markets to try to determine the trends that may be taking shape in this, likely the most important market segment in the US Market and therefore a leading indicator of where the world may be headed.
Remember, this is a definate buying opportunity, but only for the middle to long term investor. Those who tend to become emotionally involved with trading and are constantly counting dollars and cents are not for this trade. Also for this type of trading you need deeper pockets to be able to absorb a larger stop-loss. At any rate the risk-reward factor here is almost 1:5 with a chance to gain in long-term monthly time-frame investing of as much as 25% which is not bad for 8-15 months or less work.
This is the way the Weekly Chart looks:
This is the way the Monthly Chart looks:
