Reply #1: Market WrapUp [View All]

[ozymandius]

The Bigger Picture?
BY BRIAN PRETTI

Quite unfortunately, we need to quickly revisit and update a monthly discussion topic from August of this year. That discussion, entitled Doscientos Mes, primarily focused on the history and importance of the 200 month moving average in looking at and trying to assess the health of the major equity indices. We will not spend a lot of time rehashing our comments, as you are free to read or reread that discussion in our Monthly Archives. To the point, recent history of the last three to four decades tells us that very often major equity bear market lows can be found at or around 200 month moving average levels. Specifically, this is exactly where the NASDAQ bottomed at the 2002 lows. The Nikkei flirted with and danced around its own 200 month MA for almost half a decade prior to plunging below its own 200 month MA, which has not acted as upside resistance for a good decade. As we stated in the August discussion, failure to find support at the 200 month MA may indeed be quite the fundamental and technical warning sign. Events of the last few months, especially October, force us to revisit this topic and perhaps expand our time horizon viewpoint just a bit in terms of watching the forward character of the major equity indices. This is one of those discussions where the charts do the bulk of the talking.

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When we wrote the article in August, it was a warning about potentially reaching the 200-month moving averages for the major equity indices. The time for warning is now behind us as you are fully aware. Every major US equity index reached and exceeded their respective 200-month moving averages to the downside in October. The following charts very simply review where we stand at October month end. But what we’ve also done this go around, and what we believe is now important in light of recent months financial market activity, is to try to broaden our thinking into a much bigger picture time frame than we have so far into this current down cycle. Why do this now? The market is forcing us to do so. Have a look and we’ll have comments below.

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Quickly, as a bit of an adjunct to the very long cycle Fibbonacci retracement sequences we’ve drawn into the charts above, we also want to highlight the well known Dow Theory 50% principle. We’ve been ranting and raving over the 50% principle of Dow Theory in many a discussion over the summer. But the 50% retracement levels for the major equity indices observed over the 2003-2007 bull market were cut through like a hot knife through butter over the last month. We suggested to subscribers that should 50% bull market retracement levels of the 2003-2007 bull be violated, there would be trouble. The 2003-2007 Fib retracement levels provided almost zero technical support. Although we may sound reactionary based on recent month events, we believe we need to incorporate longer cycle thinking and analysis into the equation as we move ahead. So as we review the charts above, those 50% Fib retracement levels from 1980 lows to present now become critical, in addition to watching the 200 month moving averages.

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