Tuesday, June 11, 2013

Comparing the last two long term trading ranges (1966-1982 + 1998-2013)...

I thought it would be interesting to take some time and dissect some of the price action that occurred during the last long term trading range in the major averages, and then compare that price action to the current long term trading range that we have presently broken out of. This is meant to sort of piggyback off one of my previous posts that used some analysis of historical price action to come up with a 150,000 price target on the Dow Jones Industrial Average over the coming decades. Please note that the intentions for both of these posts is to attempt to bring a different perspective to some of the stuff out there, and to give readers with an open mind some food for thought. It is strictly from a technical standpoint and not a guarantee or even a prediction for that matter. I am well aware that market patterns can be broken at any time and that just because the market pattern exists that doesn’t mean they will continue to work. So let’s dive in!

The chart above is a monthly chart of the Dow Jones Industrial Average during the last major long term trading range beginning in 1966. I have highlighted the three highs on the chart along with the price level and date it was put in, as well as highlighting the price level of the three lower lows, the date and size of the decline. Note that once the third lower low was formed in 1974 after a 47% decline in the average, a bull market emerged that took the Dow to new all-time highs and although there were bear markets along the way like in 1987, the major averages never really looked back.
Now let’s take a look at the price action during this current long term trading range. This chart above is also a monthly chart of the Dow Jones Industrial Average. Likewise I have highlighted the price level of the three higher highs, along with date. As well as the three price levels of the lower lows, date and the size of the decline. Now let’s take a look at the similarities, first off we have a similar pattern of three lower lows, each producing bigger drops than the previous. Notice also the similarities in the size of the declines in terms of percentage. The 1966-1982 trading range produces three drops of 26%, 37% and 47% respectively. The 1998-2013 trading range produced three drops of 21%, 39% and 54% respectively.
Now if you recall during the 1966-1982 trading range the third low was the final low before the real breakout. Now we find ourselves in a similar predicament where our third low produced back in 2009 has been followed by a legitimate breakout to new all-time highs on both the Dow and the S+P 500. Will it hold? Only time will tell, but in the meantime it seems to me that it would not make a whole lot of sense to fight against this trend until/unless sellers and bears can prove themselves. One way they can do that is to push prices back in this long term trading range below the 2007 bull market high coming in around 14,200.

Now let’s finish off this discussion by taking a look at the specific bull market that broke the 1966-1982 trading range and the specific bull market that (so far) has broken the 1998-2013 trading range. Let’s use the S+P 500 for this, since it’s probably what most traders look at more often these days.
Above we have a monthly chart of the S+P 500 showing trading that proceeded the third and final low of the 1966-1982 trading range in 1974 and the subsequent breakout. Once again I have noted the price level of the three higher highs that occurred before the breakout, along with the price level of the three higher lows and the size of the decline. Basically three declines each greater in size than the previous before the breakout.
Now above we have yet another monthly chart, this one is also of the S+P 500 and it shows the price action off the 2009 and third lower low in this most recent long term trading range. Again there are some notable similarities in regards to the higher highs, higher lows and three separate declines all slightly bigger than the previous. And just like the declines inside of our long term trading range that were similar in size. The declines inside each of the bull markets off the third and final lows suffered similar sized corrections in between. The bull market off the 1974 low produces corrections of 13%, 20% and 28% before breaking out of the trading range, meanwhile the correction off our 2009 bull market low suffered corrections of 9%, 17% and 21.5% before this most current breakout to new all-time highs.

So there you have it! At the very least I hope you find the similarities interesting. Like I said in the introduction, this doesn’t mean the same pattern will continue forever. It could stop tomorrow for all I know. Please don’t get me wrong, I don’t want to dismiss or shrug off the seriousness of some of the economic struggles and realities that we are facing. They are very real indeed. All I wanted to accomplish here was to offer a different perspective to think about. What if, just maybe the worst case scenarios, that we are consistently bombarded with on a daily basis, don’t actually become a reality? Maybe the economic fundamental confirmations that we are all looking for do become a reality but not until the middle to later stages of this macro bull market? Maybe I am just a hopeless optimist? I’m certainly not an economist by any means; all I know is what the price charts tell me. I hope for all of us that these market “predictions” and patterns become a reality, but not just in terms of stock market prices but in our quality of life.

Thanks for taking the time to read this post, I hope you enjoyed it.