An Important Level The Dow Hasn’t Broken… Yet

Guest post by Susan C. Walker:

Remember the book that came out at the top of the dot.com mania in 1999 with the title, “Dow 36,000”? Within six months of publication, the stock market bubble burst and that prediction didn’t come close to being fulfilled. One of the book’s authors is now trying to make amends with a recent op-ed apology in the Wall Street Journal to introduce his new book, “Safety Net.”

Contrast that with an equally bold forecast Robert Prechter made last month that has held up: The Dow Industrials won’t break 12,400 this quarter.

Prechter’s market call was based not on mania madness, but on a wave pattern that began in the early 1930s. He wrote to Elliott Wave Theorist subscribers on February 15 that the Dow would not break the 12,400 level this quarter for a compelling reason — because that level is part of a decades-long trend channel that provides a large degree of resistance. In terms of the scale of his vision and the degree of the wave count (what we call a Supercycle Degree), Prechter’s forecast is just as bodacious as “Dow 36,000.”

Point of fact: Right after he published his forecast, prices in the Dow kept rising that week. In fact, they rose right up to 12, 391 on Friday, Feb. 18.

And then what did they do the following Monday?

They fell off.

And they have continued to fall off to below 11,900 through March 15, 2011.

That’s what you call good technical analysis. Forecasting is based on probabilities, so no one gets it right every time. But this is a perfect example of spot-on analysis coming to fruition. Now, we will wait to see if 12,400 will continue to provide resistance to the Dow through the end of this quarter two weeks from now.

Read for yourself how Prechter described the situation last month in this excerpt from the Theorist. (We also provide a chart that subscribers received — with a few labels deleted.) Then decide whether you should have this same kind of invaluable analysis delivered to your email inbox the middle of every month. For a limited time, you can start the Financial Forecast (which includes the Theorist) at a deep discount. Learn more about your special offer.

Excerpted from The Elliott Wave Theorist, published February 15, 2011

Dow is About 100 Points from its Supercycle-Degree Resistance Line

Way back in 1978, Elliott Wave Principle showed the developing trend channel of Supercycle degree. We have been tracking prices with respect to this channel ever since.

As happened in the 1920s, the smaller Cycle degree channel was steep and carried prices above the longer term upper channel line. …[T]he rally into 2007, came back to test the underside of the lower line of that smaller channel.

Now [another] wave is stretching towards the upper channel line of the Supercycle, the one touching the highs of 1937 and 1966. This line denotes a Dow that, from a psychological point of view (not to mention other points of view) is “extremely expensive.” The peaks of 2000 and 2007 were “ridiculously expensive.”

When prices exceed an upper channel line (in what Ralph N. Elliott called a throw-over) and then fall back below it, they sometimes return to test it before turning down in greater earnest. The April 2009 Elliott Wave Theorist showed an example of such an occurrence in the Gold+Silver Index in 1980.

This quarter, the line cuts through prices at approximately the Dow 12,400 level. Given the wave labeling and the extreme sentiment, the market seems poised to stop near the trendline. Given the importance of this line, the market would almost surely have to accelerate strongly to penetrate it.

The Dow stopped just short of the 12,400 level at 12,391 on Feb. 18 and has fallen away from that level since.

Want a Reason to Believe in a Downward-Trending Dow? We are bearish on the Dow, and if you are, too, the best way to find out how to take advantage of a bear market is to read our Elliott Wave financial forecasting service, starting with Robert Prechter’s Elliott Wave Theorist. It’s always compelling reading. For a limited time, you can start the Financial Forecast (which includes the Theorist) at a deep discount. Learn more about your special offer.

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One Response to An Important Level The Dow Hasn’t Broken… Yet

  1. jim says:

    See:
    http://myownadvisor.blogspot.com/2010/07/doomsday-should-you-care-what-robert.html

    According to the article, Prechter expects the DJIA to fall below 1000, and “likely below 400.” So at the upper end of his range, he expects about a 92% drop from Friday’s close. Hmm, if you scaled down even IBM alone by that amount, it would be selling at about 12.

    Sorry, but this doesn’t seem credible to me.

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