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Well then, take a good look at the chart in Fig 1, but don’t read the labels yet. Can you tell which major index this is? Is it the NASDAQ or the S&P 500, you ask? Well, it’s neither, I claim. “But wait, I know that chart, that’s the NASDAQ. I even recognize the three year pullback off the double bottom,” you plead. But wait, before I refute that point, let me quiz you on your technical prowess. What’s going to happen next? “Well, according to my encyclopedia of chart patterns, it's an ascending triangle, so it should go up. But wait a minute -- the economy is in a quagmire, people are out of work, and the treasury yield curve is flattening, so it must go back down.” Ok, so you know your technicals, but it doesn’t make sense in light of such a bad economic outlook. Well ,allow me to let you in on a little secret; I know the future of this chart. But, first let me reveal the index. It isn’t the NASDAQ or the S&P 500. It’s – surprise – the Dow Jones Average about seventy years ago.
Fig 1. Major Index 5-Year Chart (courtesy of www.prophet.net) For the group that subscribes to the theory that the markets are truly random and have no underlying systematic superstructure, I challenge them to explain the striking similarities between this generation’s two-decade trailing NASDAQ chart and the comparable behavior of the major index seventy years ago. For comparison purposes, I have included a recent snapshot of the NASDAQ right below.
Fig 2. Six and a half year chart of the NASDAQ (courtesy of www.prophet.net) Each index suffered a major drop from a bubble high, which took about roughly three years to complete. The Dow lost approximately 90% in the three-year period commencing in the month of August 1929. NASDAQ lost approximately 80% in a similar time span starting in March 2000. Then approximately three years later, they managed to retrace roughly 20% and 30% respectively. An ascending triangle envelope bounded each retrace. Both were in secular bear markets with an enormous amount of pessimism circulating through the thousands of investors who got burned by the popping of the bubble. But, while pessimism was rampant then just as it is now, it helps to look at how the Dow ascending triangle actually did resolve. Fig 3 shows that the bearish chart didn’t pull back down. Rather, it extended into a rip-roaring two and a half-year bull market that managed to retrace all the way up to almost 50% of the Dow’s loss. While this may or may not occur in the NASDAQ's future, I believe the structures are far too similar too ignore. And while the shorts would indeed get their projected pullback several years afterward, they would also have been burned so badly in the two and a half year bull that I doubt they would have much capital or moral left to participate in the return back down. If the NASDAQ follows such a course, which is not too far fetched considering the remarkable similarities to date, the shorts will have their heads handed to them on a plate over the next three years. Hopefully, this comparison of the graphical behavior and similarity of the two charts over roughly equal periods serves as a cautionary tale to the shorts, as they continue to get slaughtered by the illogical unfolding of events in today’s markets. I know it sobered me up.
Fig 3. 20-year chart of the Dow: 1922-1942 (courtesy of www.prophet.net)
Fig 4. 20-year chart of NASDAQ with potential trajectory 1998-2018 (courtesy of www.prophet.net)
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