Dow Jones Stock Market Forecast to Sept 2008
Stock-Markets / US Stock Markets Jul 14, 2008 - 02:08 AMBy: Nadeem_Walayat
The Dow Jones has until recently been closely following the roadmap for 2008 posted on 24th March 2008 as part of the Global Stock markets outlook, i.e. both the rally to early May to 13,136 and the subsequent downtrend to 11,700 by the end of June were virtually spot on. The analysis was confirmed in the analysis of 3rd May 08, which concluded that Sell in May and Go Away would be occur this year as transpired during the subsequent decline into the end of June as the below road map chart illustrates from the March article.
However the break below the support level of 11,500 represents a serious deviation from the anticipated trend which had originally called for a bottom to be made by now around a price of 11,700, against the last close of 11,100 on the 11th July 2008. Whilst the absolute price is not important, what is important is the break of support, which implies weakness rather than strength for the next stock market up swing, that had envisaged a trend back up towards 13,000 by the end of September 2008. Therefore this analysis seeks to update to the roadmap / forecast for the Dow Jones to try and gauge the likely trend for the next 3 to 4 months that would take the Dow Jones into late September.
Charts courtesy of Stockcharts.com
Briefly - Fundamental Background
Fundamentally the situation has continued to deteriorate on the earnings front and little sign of an imminent low either in the housing market or the banking sector which on Friday saw the financial sector on the brink of collapse as Fannie Mae and Freddie Mac crashed by 50%.
The other major event since March has been the surge in the oil price which has carried crude oil from $100 towards the $150 target for the year in just 3 months! Which is probably the prime reason for the deviation in the Dow's trend and worsening of the technical picture for the stock market which has triggered a technical bear market on a fall of 20% from the high. Therefore the crude oil price is an important factor in determining future trend of the Dow Jones Index.
However , as I mentioned in the recent article Crude Oil Seeking Black Swan for Spike above $150 in Overbought State, we have the problem of an black swan event, namely an attack against Iran's nuclear facilities that would result in a spike higher that would be accompanied by a major sell off in the stock market. The only way around this possibility is the need to arrive at an conclusion, and in that regard my conclusion is that there will NOT be an attack on Iran and therefore the future trend in crude oil during the next 3 months will be orderly i.e. based on technical factors rather than a Black Swan event.
Even so, crude oil will remain volatile due to the rumours of an attack which will make the stock markets volatile, unfortunately these rumours could occur at inopportune times that may trigger sharp declines i.e. if the stock market has fallen to support and a strong rumor occurs that spikes crude oil higher at that time, then that would trigger a break of support, which is precisely what transpired during late June. So I also have to factor in the probability of rumours into the Dow Jones road map, therefore a much harder exercise then the orderly crude oil trend observed from March to late May which was anticipated to juncture at that point for a significant correction that never transpired.
Technical Analysis of the Dow Jones and Road Map July to Sept 2008.
The current breakdown below support of 11,731 is undoubtedly bearish and thus implies a weaker trend. However the seasonal bias for an uptrend into the US election still remains, as the swing pattern observed to date still matches the expected trend, its just that the timing and the magnitude of the subsequent rally is now in question.
Short-term Trend
On Friday we witnessed how close the stock market came to a crash on the Indymac bust and Freddie & Fannie about to burn the house down. Therefore again, technical's may be outflanked by Black Swan events.
On a short-term basis the Dow Jones is oversold and the MACD is eager to give a bullish cross, this therefore implies a rally is imminent. The immediate target for which is the down sloping trendline presently at 11,600 and then the 11,730 previous low, thus representing a healthy move of over 600 points on Fridays close and represents the direction of the next initial minor swing. Beyond that we need to look at the longer term picture.
Long-term Trend and Road Map
I cannot ignore the fact that we are now in a technical bear market therefore the following rally is expected to be corrective. I.e. we are at somepoint going to revisit the low seen last Friday.
The MACD is undoubtedly oversold but bearish longer-term, i.e. it is confirming that we are in a bear market where the trend will be between oversold and neutral.
Elliott Wave theory failed on the upside peak to 14,200, which was at a Wave 7. However subsequent trend is confirming a bear market of three waves down, of which A and B have been completed, this again suggests that the current rally will be corrective in nature, with the Dow destined to revisit and break recent lows.
A Break above 12,500 would be considered bullish and imply an assault on the 13,136 high.
A break below 11,000 would imply a continuation of the bear market and start of the C wave decline.
In Conclusion
The Dow Jones is expected to make an imminent low if it has not already done so. The expected uptrend will be volatile, but targets a move to above 12,100 by September 2008, which represents a move of +1000 from the last close. However, this is a much harder call to make than the one in March given as we are in a bear market and so many potential Black Swan events exist such as last Fridays near crash on the Indymac, Freddie Mac and Fannie Mae events, and the risk of an Oil Price Spike following an attack on Iran that will reassert the downward bear market pressure and lead to an earlier termination of the anticipated corrective rally.
Yours seeking to lighten ones portfolio on corrective rallies analyst.
By Nadeem Walayat
http://www.marketoracle.co.uk
Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.
Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
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Comments
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PB
14 Jul 08, 19:11 |
Iran Attack
Nadeem, From your perch in the UK, you are very hopeful. The Israelis will not stand and wait for the Iranians to get the Bomb. I know the region and the people well. The Iranians hate the Arabs, or as one told me..’the desert dogs’. One way or another, the Iranians will give up the Bomb or get a dose of “72 virgins’. The Global Financials are broke, not just in the US/UK but globally. But the good news is, I’m up for the Year in Gold, silver, cash, and Energy and no Debt. And converting my transportation to CNG. The current price is $.90 per gallon. Less than a dollar and in endless supply in Oklahoma. Obama will NOT win. Cheer up, it could be worse. |
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Nadeem_Walayat
14 Jul 08, 19:13 |
Iran Attack low Probability
Hi A forecast is just an educated guess based on probabilities. I was right on Iran during 2006 and 2007 when there was much chatter about an imminent attack against Iran from many quarters, which never happened Offcourse I watch for signs of a CHANGE in trend that would increase the probability of attack at some point, but for now the risk of attack appears to be very low. |
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Larry
16 Jul 08, 01:14 |
Iran Attack
Russian warships are with nuclear capability are deployed in the Med. "The Israelis will not stand and wait for the Iranians to get the Bomb" says PB. A nuclear exchange next year? |
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PB
01 Aug 08, 23:29 |
Obama to House Dems: If Sanctions Fail, Israel Will Likely Strike Iran
Mr Walayat, Per your prior comments, I thinks you might reconsider your position. See comments from ABC below. On the ABC websit. Obama to House Dems: If Sanctions Fail, Israel Will Likely Strike Iran July 30, 2008 9:30 AM Sen. Barack Obama, D-Illinois, met with House Democrats yesterday, talking about his trip abroad and his observations. Obama told the caucus, according to an attendee, "Nobody said this to me directly but I get the feeling from my talks that if the sanctions don't work Israel is going to strike Iran." Others in the room recall this as well. The notion that Israel is preparing for such an action against Iran's myriad nuclear facilities is not new, with conjecture heating up in May after an Israeli military exercise featuring 150 aircraft flying almost a thousand miles over the Mediterranean Sea in what was seen as a dress rehearsal for an air strike. Now that the Bush administration is engaged in diplomatic efforts with Iran, many Israeli officials are worried the US is getting soft on Iran, prompting Israeli Defense Minister Ehud Barak to travel to the US this week to meet with Defense Secretary Robert Gates, Secretary of State Condoleezza Rice, and National Security Adviser Stephen Hadley. Barak's office released a statement saying "a policy that consists of keeping all options on the table must be maintained." Another attendee at the meeting of House Democrats recalls Obama saying that the good news is that Obama got the sense that the Arab states understand just how destabilizing a nuclear Iran would be -- a "game changer," Obama said -- because they know Israel would probably strike and that would be bad for everyone. A senior adviser to Obama told ABC News that Obama was heartened to hear Jordan's King Abdullah share that view with him in their private meeting. The Obama campaign had no comment. - jpt UPDATE: Obama campaign spokesperson Wendy Morigi provided the following statement: "Senator Obama has always said that Iran must end its illicit nuclear program. He has advocated tough, direct engagement, backed by stronger sanctions to pressure Iran. And, he has made it perfectly clear that Tehran should not wait for a new administration to reach agreement to end its program." July 30, 2008 | Permalink | User Comments (317) |
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Nadeem_Walayat
01 Aug 08, 23:32 |
Iran Forecast Inforce for duration of 2008
Hi The forecast for Iran is for the duration of 2008 as once I arrive at a probable scenerio, I stick with it for sometime, usually into expiry, or it is proved wrong by subsquent events, and so far Iran has not been attacked and the market is increasingly leaning towards the view of no imminent attack hence the drop in crude from $147 to $124, whereas if an attack was imminent you would be looking at crude north of $170. See Analysis of 4th July 08 - http://www.marketoracle.co.uk/Article5325.html Best. NW |
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