Dow Industrial Average

A study published here a while back by Rick's Picks reader Wim Grommen explained how constant tinkering with the components of the Dow Industrial Average has inflated and obscured its true value. Now comes another paper from Wim that shows why a global economic era characterized by high innovation, prosperity and major productivity gains has likely peaked. For the full report click here.

For the record, the bigger picture implies that the Dow will fall to at least 10643 (and thence to 9566, its 'D' sibling) if and when it drops out of the presumptive distribution pattern that has been under construction for the last six weeks. Although a head-fake above the 11717 peak recorded on September 1 is always possible, my hunch is that it would not be a head-fake at all, but rather a bull trap that could take longs and shorts up to last spring's highs around 12500.

As anticipated, stocks have finally fallen out of the ominous distribution pattern begun in the wake of early August's heavily oversold lows. For the Dow, this implies more hard selling all the way down to 9569.  Note in the accompanying chart that the sibling 'p' midpoint of that Hidden Pivot, 10643, was exceeded yesterday by 46 points -- sufficient to imply that a further fall to 'D' has become an odds-on bet.  Our bias as traders should therefore be bearish for now, although a dead-cat bounce today exceeding 10940 would offer bulls a very faint glimmer of hope for the near term.

If you've ever suspected that Wall Street stacks the statistical deck to boost share prices, here's an academic paper that explains exactly how it is done.  The author, Wim Grommen, a Rick's Picks reader from the Netherlands, goes as far as calling the constant recalculating and rejiggering of the Dow Industrial Average a pyramid scheme.  Click here for the complete study, which explains how, from a mathematician's perspective, the Crash of 1929, as well as the exponential rise of U.S. stocks during the 1990s, were brought on by bogus math.

Jitters over Greece’s increasingly dire financial plight are waxing yet again, taking Wall Street traders by surprise if no one else. The Dow Industrial Average dove 303 points Friday on speculation that Greece would fall into default when the new week began. As of late Sunday night, however, there was barely a word about Greece on Google’s news page – only a story about rioting in the streets following enactment of a new, $2.7 billion property tax in the name of austerity.  That’s the relatively good news. The bad news is that France, of all countries, was generating scary headlines of its own: Woes at French Banks Signal a Broader Crisis, declared the Wall Street Journal.  “France’s largest private-sector banks will likely suffer further credit-rating downgrades this week, the latest sign that the debt crisis on the euro zone’s periphery is slowly infecting the core of the region’s financial system,” noted the article.  Just when we thought the panic was about to engulf Spain and Italy, the spinmeisters insert France into the picture as a buffer, a default risk calculated to be at least somewhat less thinkable than the one threatening to inundate France’s two large neighbors to the south. We doubt the diversion, if that’s what it is, will last for long, however, since, as everyone but the Powers That Be seems to understand by now, we’re all in this together -- Europe, the U.S., China, Japan, South America, Russia et al.  That fact hasn’t stopped U.S. banks from choking off lending to their European counterparts in recent weeks in a delusional attempt to distance themselves from the coming euro-implosion. Do Citibank, J.P. Morgan, Chase, Bank of America and their ilk actually believe their timid, eleventh-hour avoidance maneuvers will keep the blood-dimmed tide at bay when market forces ultimately

[Our longtime friend Tom McCafferty, a veteran commodity trader and author of numerous books on the subject, knows a thing or two about making hay when stocks and commodities turn volatile. In the essay below, he explains why the markets have been so nervous lately.  Fortunately, in the violent swings that have been occurring from day to day and week to week, he sees the trading opportunities of a lifetime. RA] Recently, Rick did some of that great technical analysis he is known for, and after he studied the formation the bones made on his sacred cloth and cut open a few toads to check their entrails, he came to the conclusion that the Dow Industrial Average is headed for a bull rally.  Next we took a look at the fundamentals – the European banking situation, upheaval in Africa, labor problems and loss of competitive edge in China, the U. S. job and housing markets—and we grew very bearish.  In other word, today’s Market is like a Joyce poem: you can read into it just about whatever you want. We become further confused when we see so many strong companies sitting on tens of billions of dollars, and, at the same time, they are laying off staff.  With their fat bankbooks, there are just too many of them striving to get leaner and meaner.  On top of that, quarterly earnings are pretty damned good.  We needed a good reason for this behavior. Then it dawned on us.  It was so simple we were embarrassed.  The whole world is suffering for a “Compliancy Complex.”  You will not find that dysfunction described in any medical textbook, but we know in our heart of hearts what it is.  There is just too much unexplainable information overwhelming us at one time, to wit: •          

The summer's powerful selloff is still merely corrective on the monthly chart (see inset).  I mention this not because I think the market is likely to come roaring back to new highs, but to remind you that we must always interpret the signs disinterestedly.  If we do so here, it forces us to acknowledge that the second phase of the Mother of All Markets, begun a little more than a year ago, exceeded the required "internal" and "external" peaks to create a bullish A-B leg of monthly-chart degree. Although it has recently given way to a less powerful bearish one suggestive of a "duel," this dynamic, strictly speaking, implies that the bulls still hold a slight edge.

Yesterday's 600-point bounce created bullish impulse legs on the lesser intraday charts although -- surprisingly -- not on the hourly chart (see inset).  I see little value in putting out trading points ahead of whatever wildness obtains on Wednesday. However, a 50% retracement of the plunge from July 22's peak would put the Dow at 11678, while a 61.8% retracement would imply 11931. We can use the lower number as a minimum upside objective for this dead-cat bounce, but either number can be shorted using camouflage.

At yesterday's lows, the Indoos had exceeded by 27 points a 0.618 retracement of the bull cycle begun last July from 9614. However, it would take a further collapse of nearly 2000 more points to retrace 0.618 of the Mother of All Bear Rallies begun in March 2009.  The exact level is 8872, and we should remind ourselves that, hard as the averages have fallen in recent days, it's possible the worst is still to come. Most immediately, though, the Indoos are stealing up on the 10784 target shown. Its breach would of course be warning of yet more weakness to come. I am not suggesting that you bottom-fish in the Mini-Dow, however, because the equivalent pivot has already been exceeded.