Sunday, October 05, 2008

My Crystal Ball Says We Rally (for a bit)


Tonight I'm going to say pretty much the same thing I said two weeks ago, that the second leg of this bear market appears to be over. It is true that we made a lower low last week on all the averages, but that lower low came on decreased volume and we are nudging up against the lower end of a descending broadening wedge. In addition, all indicators are at extreme oversold levels and volatility/fear is at all time highs. Meanwhile, governments around the world are taking unprecedented measures to re-store liquidity and confidence in the markets. There's an election coming up which tends to be a good period for stocks historically and I think all the elements are in place technically for a sustained rally. I'm modeling this bear market using a standard 5 wave pattern which includes three stages or "legs" lower (denial, acceptance & despair). I'm suggesting that we are finished with the "acceptance" stage, its all over the news right? If you asked me to estimate the price action going forward I would use the previous three waves as guides for the next two. I come up with a four month 16% rally from here to 12,000 followed by a four month 27% decline to 8,700. This puts us at the next major top in January and estimates the end of the bear market some time in mid 2009. This is rough and will have to be adjusted as we go forward but I continue to expect a sustained bear market rally. On the other hand, my crystal ball might be broken.

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