Has the Dow Jones already peaked?

Should we beware the Ides of March? So warned the soothsayer to Julius Caesar in 44 BC. He should have taken note because, according to Shakespeare, he was assassinated on that very date (which falls tomorrow this year).

That soothsayer could make a lot of money if he were around today and appeared on CNBC. And all the other stock market pundits would quickly be out of a job.

As a soothsayer of the markets, I don’t have that 100% record. But before I left for my break, I did make a case that stocks would very probably make highs in the month of March.

This is the weekly chart of the Dow that I made on 24 February:

140314-MWT01

My basic premise was this: From the 2007 highs, I can count a clear five-wave impulsive wave pattern down to the March 2009 low at the 6,500 level. That date is highly significant.

I can make two projections from this low. First, the next major move would be an upward corrective move. Second, this move would likely be in an A-B-C form.

It has taken five years – almost to the day – to produce this picture of a textbook A-B-C relief rally pattern.

My question is: Why has it taken so very long to stretch out this relief rally? For bears such as myself, it was been an agonising time, although there have been some terrific shorting opportunities along the way.

Blame it all on QE

The decline off the 2007 top took around 18 months. The relief rally has taken 60 months (so far) – over three times as long as the decline.

To me, the reason is encapsulated in only one factor – quantitative easing (QE). This mammoth increase in funds available for stock speculation started from the depths of the credit crunch. And it has encouraged financial institutions to jump on the stock market bandwagon in an effort to repair the damage done to their firms by the credit implosion.

And as markets recovered, sentiment has followed to the point now where we are seeing bubble-like behaviour in many sectors.

But what is fascinating to me in the above chart is that the major low of the relief rally (my B wave low) occurred precisely 30 months from the March 2009 low.

The best cycles are the ones that fly under the radar

Project forward 30 months from March 2009 and we come to March 2014 – this month.

This is an example of the use of cycles. The study of cycles is a well-researched area in the past. If you analyse historic charts, you will quickly find many examples of patterns being repeated in a cyclical manner. At one time, the four-year stock market cycle was a popular topic. This pattern coincided with major tops and bottoms four years apart.

Lately, virtually no-one is talking about cycles – and that’s because the consensus believes stocks are on an ever-upward path. To me, that is a clear warning sign that cycles are quietly operating under the radar – and my new discovery may indeed be one in operation right now.

The key point about cycles is that they only work when very few analysts notice them. When a particular cycle is splashed around in the media, it is best to reject it as a basis for forecasting.

One way to keep track of the popularity of cycles is to scan the new book releases. If there are few on cycles, then your time is well spent in searching for them!

How to find that major monthly top

So if I am looking for a major stock market top this month, is there more evidence that another index can tell me?

Here is the monthly FTSE chart. Often, the monthly chart can reveal clues that shorter-term charts miss.

140314-MWT02

Just as in the Dow, there is a well-defined five-wave impulsive pattern off the 2007 highs to the March 2009 low, and the relief rally is in a clear A-B-C.

The 2007 highs were in the 6,800 area, and in the last few months the market has rallied to this region. But note that every time it has poked above the 6,800 parapet, it has been shot back down into the trenches. The pigtails of the past few months give the game away.

This means the market considers the 6,800 level as very strong resistance.

Also, the lower line represents support because I have drawn it across two major tops. The market is currently trading inside the zone between the support and resistance levels. Once it breaks free, the moves should be dramatic.

What QE and tapering mean for the markets

Note the important momentum readings – the maximum for the rally occurred in early 2010 – over four years ago! And since then, the rally has been sustained on a steadily weakening buying power. That is one powerful demonstration of the declining effect of QE. As the added QE liquidity since inception has had a gradually declining supportive effect on the GDP of the USA, so it has on the stock market. Also in the mix is the Fed’s current tapering policy, thereby reducing even further the stimulus effect.

Are there any shorter-term clues as to immediate direction?

140314-MWT03

Here is a tramline trio that I am working on the daily Dow. The upper line has a terrific prior pivot point from October 2011 and clips the important highs in late 2012.

Also, there was an important high on 22 May 2012. If you were reading my articles at the time, you will recall that I identified that top and an excellent short trade resulted.

But in the past few days, the market has made a kiss on the underside of my centre tramline and is backing off it very sharply in textbook ‘scalded cat’ fashion. This action supports my contention that we have indeed seen a major top already this month and the path of least resistance is now down.

Although the Ides of March fall tomorrow, is the Dow high on 7 March just one week early from that fateful day?

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading
Advanced tramline trading
An introduction to Elliott wave theory
Advanced trading with Elliott waves
Trading with Fibonacci levels
Trading with 'momentum'
Putting it all together

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3 Responses

  1. 14/03/2014, norman wrote

    Can an ABC rally exceed the highs from before the move down? I thought it was supposed to be a type of bounce and therefore not exceed the previous highs.

  2. 14/03/2014, Bronco Bill wrote

    Good article John, couldn’t agree more.
    With reference to the monthly FTSE chart it may be worth noting that it took one year for topping out to complete beginning in 2000 to 2001 and 2007 to 2008 before big declines, with a gap of 7 years.
    This year is another 7 years since the last top of 2007/2008 and with momentum indicators diverging big-time with the tops allready made it certainly looks like a topping out is in the making this year and another steep decline could follow. Buy Gold.
    As you’re into stockmarket cycles John how about “Kress Cycles”.
    According to this we are all living in a unique time as our generation will witness a very rare event, namely the bottoming of the Grand 120 year cycle.
    It tends to produce huge changes within social, political, financial and economic fabric. (All going to plan so far). The last 120 year cycle of the 1890′s marked a time of severe economic depression.
    There’s a lot to look forward too.

  3. 15/03/2014, anne wrote

    Dear John, Dow support is at 16000 for march ’14, once support breaks your wish may come true. anne.

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