I have been using the Dow Jones Industrial Average (INDU) crash of 1929 and subsequent market as a roadmap to the Nasdaq Composite (COMPQ). The markets do not match exactly in price/time movements, but they are very close. Comparing the 1929 Dow top to the 2000 Nasdaq top shows a comparable bottom a couple years later. An approximate five year bull market led to the most recent top on the Nasdaq in 2007 and a similar high on the Dow in 1936.
A bear market of approximately 18 months put price to the March low of this year. The Dow then moved up 63% into the fall of 1938. The Nasdaq Composite has moved up as high as 45% off the low in the first 120 calendar days from the March low. The Dow moved up about 50% in the first 120 days in 1938. So far, right on track.
Today I am looking at the ValueLine Arithmetic (VLE) index to judge the move off the March low.
The VLE has moved up at 8 times the slope of the bull market from 2002-2007. The initial move off the low is usually at this angle, but it is rare that the market continue up at this slope beyond 90 days. The current move is nearing 120 days – which is a place to watch for a change in trend. So this week price must be watched closely for continued weakness.
Judging the current move against the 2007-2009 bear market shows price moving up at twice the slope that it moved down. Remember how violent the move down felt? Well, the move up is at twice the rate.
Comparing the most violent dropped from the summer of 2008 to the spring of 2009 shows price moving up at half of that slope. the first 60 days moved at the same slope but price has backed off over the last 60 days. With price at the 1×2 angle, a strong move should bounce from here. There is a type of head and shoulder bear pattern forming but usually the bears would want to see the right should develop below the left.
The daily swing chart shows a possible 8% drop to half the angle of the move up. I do not want to see price exceed this line. If it does that tells me the trend has most likely changed.
The key thing to keep in mind is that the market has already moved up the majority of move of the 1938 market. My opinion is that it will be expecting too much for the current market to exceed that move of the Dow in 1938 by more than a few percent. If the Nasdaq moves above 60% above the March low this year then I will become somewhat bearish. Note that the Dow resumed the bear market for about three more years following the 63% bull run.
Monday Morning Update:
One point I missed yesterday is that the market has corrected about 30 days after a 90 day run. (Shown on the VLE 2008 Range Square above.) This week is a perfect time for the market to start the next leg upward. But if the market intends to go down then this week is also a good time for that. Watch and react accordingly.
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Tags: DJIA-Dow Crash 1929-1942 · Market Outlook · Roadmap · Value Line Arithmetic Index (VLE)No Comments
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