-- Posted Tuesday, 14 October 2003 | Digg This Article
The following multi-decade monthly chart of the Dow shows the 50-month moving average acted as strong support during the secular bull market, halting the crash of 1987 and downward movements in the early 90's as well. The 50-month moving average should now act as strong resistance for the remainder of this secular bear market and most likely signifies a top for this counter-trend rally within the secular bear market. Note the RSI has recently decisively broken the 50 line for the first time in two decades. This counter-trend rally has turned the RSI positive again above the 50 line, but I believe this is temporary and the next downleg will turn the RSI negative once again:
The following 10-year monthly chart shows the strong resistance of the 50-month moving average more clearly. After the initial decline in 2001, the Dow soon snapped back above the 50-month moving average, but this time the 50-month average should provide more formidable resistance and it would not surprise me if this caused a failure of this rally altogether. Note also that the stochastics have crossed into a "sell" signal showing the top of this counter-trend rally may be at hand.
The following multi-decade quarterly chart shows the 20-quarter moving average also acted as support during the secular bull market, halting the crash of 1987 and declines in the early 90's. The 20-quarter moving average should now act as strong resistance during the remainder of this secular bear market and most likely signifies that the recent top of this counter-trend rally is already in place. Note the MACD which gave a "sell" signal in 2000 reached it's most oversold condition in many decades. However, with this counter-trend rally the spread between the MACD and the signal line has tightened and I believe this indicates the Dow is ready to begin another leg down which will be confirmed by more negative action in the quarterly MACD. The quarterly MACD has yet to even reach the zero line so there is still plenty of downside left in this secular bear market. When looking at the RSI it clearly shows that any dips below the 50-line have been temporary (for the last 3 decades) and presented buying opportunities. This time will be different and I believe the market will turn down decisively and consequently the RSI will also break decisively below the 50-line, moving into a true "sell" signal for the first time in 3 decades.
The following 10-year quarterly chart shows more clearly the 20-quarter moving average acting as resistance and should continue to act as resistance for the remainder of this secular bear market. Again, looking at the MACD, the oversold condition has been alleviated and the MACD appears ready to roll over and continue it's decline. The RSI also shows the weak bounce back above the 50-line, but I believe the RSI will cross decisively into a "sell" signal breaking through the 50-line with conviction for the first time in 3 decades and ushering in the next leg down in the Dow.
Going into 2003, I believe 23 of 23 analysts in Europe were bullish for European markets and 67 of 69 U.S. money managers were bullish on the United States stock market. So far these money managers and analysts have been correct, but I feel there is a reasonable chance the Dow will erase the gains made so far this year and the Dow will end 2003 down for the fourth consecutive year for the first time since 1929 to 1932.
It should be noted that the 1929 crash took the Dow from about the 381 level to roughly 198. The crash was followed by a rally which lasted into late 1930 which took the Dow back up to 294 area, a retracement of roughly 50%. After this counter-trend rally the Dow began it's drop in earnest, declining over 80% in the next 18 months to a final bear market bottom of 41.
The peak of this bull market saw a Dow of roughly 11,700 and the first leg down took the Dow to around 7250 intra-day. This rally has taken the Dow slightly above the 50% retracement level, but I strongly believe the rally is doomed and a new leg down in the Dow is at hand which will ultimately take the Dow into a final secular bear market bottom below 4,000. Yes the Fed will try to slow the coming decline for the election year in 2004, but I believe eventually market forces will overwhelm and defeat the Fed's attempt at halting what is a massive decline coming for the Dow.
Investors may be wondering where they can seek refuge from the coming decline in the Dow. I believe that gold is an excellent safe haven choice. Not only will it provide protection from a falling Dow, but it will also act as the ultimate currency against a falling U.S. Dollar.
The above chart of the Dow/Gold ratio although a bit dated, reveals the ratio has turned down decisively in favor of gold. As the Dow continues it's decline to a final bear market bottom, I expect gold to be the primary beneficiary taking the Dow/Gold ratio from it's current level of over 25 to 1 (25 ounces of gold for one share of the Dow) to a level of around 2 to 1 (2 ounces of gold for one share of the Dow).
Stone Investment Group
21307 Buckeye Lake Lane
Colbert, Washington 99005
Phone: 509-464-1651
Fax: 509-465-0231
-- Posted Tuesday, 14 October 2003 | Digg This Article
