Dow Reaches Critical Turning Point Breaks out to new High, but for How Long?

The Dow Jones Industrial Average arrived at a critical juncture today (July 17) and moved decisively upward in penetration of overhead resistance of 9200-9260. As of this writing the Dow, rested at 9,328—a new all-time high.

We wrote last time that a move to new highs was a possibility, and if the market pursued this course it would be indicative of underlying near-term bullish strength and would confirm what many Elliott Wave Theory analysts have said about the Dow—namely, that it will complete a "wave 5" upward before turning bearish. We appear to be in the midst of this fifth—and presumably final—wave at the moment.

The question, of course, is how much higher can the Dow go before reversing? Ultimately, we don't know and won't venture a guess. In a more "normal" market, we could estimate the approximate target point of a fifth wave using Fibonacci calculations, especially those developed by trader Robert Fischer (which we have found to be incredibly accurate at times). But at the tail-end of a raging, once-in-a-lifetime stock market bubble, reason and rationality are thrown out the window and conventional technical tools for measuring the market prove inconsistent and often unreliable. Some analysts, however, have been daring enough to venture a guess as to when and where the Dow will meet ultimate resistance. Robert Precheter of the Elliott Wave Theorist sees the bull market ending in August, "give or take a week." Cycle analyst P.Q. Wall, editor of the P.Q. Wall Forecast, says a Dow Jones 9765 is a possibility. Both of these writers have proven remarkably accurate forecasters in the past, so we certainly must give serious consideration to their predictions, but who really knows for sure? Only time will tell. We continue to urge, however, that investors/traders avoid all long positions in the stock market in anticipation of a collapse which could occur at any time and without warning. There will plenty of opportunity for profit making in the bear market ahead through short selling and other hedging techniques. We'll definitely be addressing this with more depth and detail in the weeks ahead.

The nice bear market rally enjoyed by the Dow Jones Transportations over the past few weeks is over. The Transports have fallen nearly 100 points in two days after the average traced out a nice Elliot Wave "a-b-c" near-term corrective pattern after coming out of a bullish falling wedge formation. We should now look for the bear market in the Transports to continue with prices falling below recent lows of 3250. Of course, this gives us a Dow Theory sell signal for the Industrials.

NASDAQ is in the blowoff stage of its bull market. The index has made new highs for eight consecutive trading sessions now. As of this writing, NASDAQ Composite index closed for the first time in its history at the 2000 level. When component stocks such as Microsoft, Dell Computer, and Cisco Systems continually rise to meteoric levels far and beyond their intrinsic value, you known the end is near for the tech stocks. As we pointed out in a recent issue of Leading Indicators, the earnings of each of these companies adjusted for options are actually immensely lower than reported earnings. These accounting shenanigans can only carry companies on for so long.

From a socio-cultural perspective, we known the bear market is near based on a certain phenomena occurring in the fashion world (as offbeat as this may sound, we consider popular fashion to be a leading indicator of economic trends since it reflects current socio-cultural trends and values). In the July issue of his Wellington Letter, editor Bert Dohmen commented on an observation he made while on a recent trip to Los Angeles. "Some of the stores, such as Tommy Hilfiger and Raulp Lauren, were crowded," he wrote. "But they had '50% off' sales. I asked several of the sales people if it was always that busy. They remarked that it had been absolutely dead until the sales started." Dohmen went on to point out that people will open up their wallets these days only when they can get a good deal. "But they won't pay full retail," he said.

Similarly, an article appearing in the July 1 Wall Street Journal under the headline, "Used-Clothes Shops Act Like Nordstrom," described a trend inwhich people from all walks of life—including Hollywood celebrities—are going out of their way to buy used clothing and fashion accessories. Some of this clothing is designer brand in good or nearly unused condition that allows the buyer to dress fashionably at a deeply discounted price. But the underlying point of the article was that people across America are bargain hunting for even clothing—an item that one usually never considers buying second hand.

Dohmen observed the paradox that millions of people in America are looking for a bargain for nearly everything except stocks. Stocks are the one thing that people are actually willing—indeed, eager—to pay a premium for. We see this as a "bearish divergence," so to speak, and a precursor of the bearish times to come.