In response to a special request last February, I created an overlay of two major Dow peaks — the 1937 high following the Crash of 1929 and the 2007 all-time high.

Now, a little over six months later, here is an update.

When we align the two highs, we see a radical parting of ways a little over three years into the future.

chart

Here is the same overlay, this time adjusted for inflation, which puts our current price level a bit closer to the corresponding level in late 1940.

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We can analyze market data with trendlines, flags, and Fibonacci ratios to our heart’s content. But sometimes market behavior is best understood as a consequence of historical events and policy decisions. The Battle of France in May 1940 was an example of the former. Perhaps the Federal Reserve’s last round quantitative easing is an example of the latter. The results, at least until a few months ago, were dramatically different.

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We can look back on Dow history and see the tumultuous impact of World War II on the market and the dramatic recovery that followed. The question now is whether a decade or two in the future QE will be seen as a masterful stroke of economic management or an inadequate or ill-conceived delaying tactic (“kicking the can down the road”) that ultimately worsened the Fiscal Crisis we still must face. This unconventional policy gamble is a game of high stakes — namely, the economic well-being of the United States and other parts of the world as well.

Published at Advisor Perspectives.

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Original source at: Money Game | http://feedproxy.google.com/~r/TheMoneyGame/~3/-iQ9lNtylRI/the-dow-peaks-of-1937-and-2007-2011-9

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Since last update in March 2011, quite a lot has happened. The global news empire is in trouble, Euro zone problems escalated, US Debt ceiling issues are still on the table and generally the earnings have surprised on the upside. With all of these grey swans and uncertainty, the markets have responded quite well to the price levels charted earlier in March 2011 issue. Regardless of how the news on TV may appear to be, market sentiment is not at extremes, as can be seen via AAII sentiment readings. The sentiment index is not at bullish / bearish extremes (between 25% and 45%). Therefore no caution on extremity of sentiments.


Now, let’s delve into the charts…

 

DOW


It is still in the long-term bullish channel; therefore we were looking only to buy. Initially, we were looking for buying interest around 12500 resistance. In our March 2011 newsletter we said “Next resistance is at 12500, after which any pullback should be bought with confirmation of bullish candles. Aggressive traders may look for counter trend short opportunities around that level.”

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Every time we see another week of declines, our eyes are drawn back to this great chart from Doug Short on the shape of monster bear markets.

Not only are both Japan and 1929 interesting shape-wise, there are real historical analogies between them, what with the establishment of stimulus, and then the cessation of it “prematurely” some would say.

chart

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Original source at: Money Game | http://feedproxy.google.com/~r/TheMoneyGame/~3/euXuGLMEd1w/mega-bears-update-june-26-2011-6

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A number of Black Swan events have been ignored / killed by the markets (for the time being). Apart from Nikkei, there was no signficant follow through of selling in other markets, and dips have been bought hand over fists. Also, there have been news of significant buying of Japanese equities by western investments. Perhaps, this was among the the main reason for strong buying of Yen on 16 March 2011, rather than pure speculation or repatriation (Yen surge was later fought by G7 intervention).

Several trades were triggered based on previous analysis of January newsletter, details can be found below.

 

DOW


We had both Long and Short levels charted out, but none of them were set up. Daily chart shows that the price broke below 50SMA on 10 March 2011, but since then it has reversed and is now above both 50SMA and 20SMA. It is still within long-term bullish channel. Weekly chart showed a lot cleaner price action, after bouncing off 200SMA on weekly chart (as noticed in January newsletter), it created a doji type of candle (commonly called pin bar) and then continued the uptrend. Looking back at it, although I had weekly 20SMA as buying level, but I did not update my levels based on the movement of 20SMA. Next resistance is at 12500, after which any pullback should be bought with confirmation of bullish candles. Aggressive traders may look for counter trend short opportunities around that level.

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