Chris Lau - Seeking Alpha

Tuesday, January 27, 2009

Dow Jones Industrial Average (DJIA) 6000?

I include technical analysis in my analysis of market indexes and stocks. One big name in this area of analysis was Ralph Nelson Elliot, a person who had great skills in mathematics. Admittedly, my understanding of his description of wave direction for stock charts still elude me. This type of analysis is not used in my analysis. That said, below are selected Sections from Matt Blackman's Trade Systems Guru. The conclusions are startling.

< ... >

Few in the technical analysis world would argue with the contention that Ralph Nelson Elliott was a genius who lived long before his time, even if they don’t adhere to his teachings. The wave analysis principles he developed would have been amazing had they been developed with the help of computers but they did not exist his Elliott’s day.

Born in 1871, he became an accountant with a rather illustrious career cut short by an amoebic illness picked up while working in Central America. This developed into a debilitating case of pernicious anemia leaving him bedridden at the age of 58. With nothing else to do and an actively mathematically-wired brain, he turned his attention to the markets just as stocks hit their peak in 1929.

< ... >


When the current corrective phase is over (and we could see a 2000 or more point bear rally in the meantime), the next five wave impulse pattern should register a similar price decline that unless something goes seriously wrong, puts the target on the Dow well below 7000.

This target gets even more interesting if you plot long-term trendline on the Dow (or S&P500) from the late 1970s and 1980s to present day. It also puts trendline support for the Dow back well below 7000. Finally, Dr. Robert Shiller’s long-term Price/Earnings research shows that in every serious bear market bottom back 120 years, annual trailing-ten year PEs dropped below 10 before a sustainable recovery could occur. That implies a price drop on the S&P500 below 600 or 28% below Friday’s close. And that translates to a Dow below 6000.