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A Chartist Speculation: DJIA and Bank of America

January 12, 2009

As the economy continues deteriorating, it's natural to assume the stock market will follow suite. Natural, but perhaps wrong. History clearly shows that the market operates virtually independently of the economy.

Thank you, readers, for the wealth of ideas and cash donations you sent in response to Status Report on this Site (January 10, 2009). I will be slowly modifying the site as time and energy permits.

In keeping with the notion that individuals can maintain or improve their purchasing power via hedging and some modest but informed speculation, here are some charts and my amateur's musings.

Some readers are tired of charts, some only read investment-related entries. Assuming that most readers are connected to the market via their 401K or IRA or their pension plan (CALPERS and other public-employee pension funds lost a bundle and will thus be tapping cities, counties and agencies--and perhaps employees, too--for billions in contributions), then this might be of interest even if you don't actively manage your pension or capital.

As a sidenote, what I like about the market is that it is open to speculators of modest means such as myself. A couple hundred dollars is enough of a stake to trade options, for example, though of course I don't recommend that, or anything else, for that matter: please re-read the HUGE GIANT BIG FAT DISCLAIMER below that nothing here is intended as investment advice.

The point is simply this: one does not need a stake of mega-thousands to protect some of one's purchasing power.

Once again, let's note how this chart drives a stake right through the heart of the quaint idea that the stock market is somehow related to the economy:

While the economy meandered aimlessly in stagflation and malaise for a decade, note that the stock market gyrated wildly, offering savvy speculators 40% gains up and down again and again. If the market had tracked the economy, it should have traced a steady decline from 1969 to 1982; at no point was the economic news good enough to power a 40% rise in the market. The news was uniformly dismal for the entire period 1971-1982, interrupted briefly by periods of even worse news.

So any and all attempts to predict market action based on the economy have little historical backing in Bear markets such as the one we're in now.

OK, so let's look at a one-year chart of the Dow Jones Industrial Average:

Is this the chart of a market about to fall another 20%-40%? Maybe, but all the technical evidence I see looks bullish--for instance:

1. the Bollinger bands have narrowed in a classic "basing" pattern in which volatility declines and a base is formed for the next leg up or down.

2. MACD has been in a strong uptrend for months, predating the actual moves higher.

3. As per the classic ABCD patterns of trends, small corrections have occured, allowing overbought signals to sink to oversold, setting up the next upleg.

4. The pattern since November has been higher highs and higher lows.

5. The flag/wedge was broken to the upside and is correcting as would be expected in any trend up or down.

6. The 20-day moving average has crossed above the 50-day MA--a classic "bullish cross." For those who doubt the value of these crosses, note how the Bearish cross in September presaged the huge decline.

Most pundits and market analyst-types seem skeptical that a really major rally could develop here. Some are saying the rally is over, others are calling for a weak continuation for a few more weeks, etc. Virtually no one is calling for a major rally through April or May which will reach my targets of 10,400 and beyond.

I don't find it helpful to attempt to align the market with the headlines about the economy or earnings or anything else. I am looking for some Bearish indicators in this chart and am having a hard time finding any of equal weight to the bullish trend signals.

Let's look at a stock in the "doomed" financial sector, Bank of America:

I should mention here by way of disclosure that I called for a rally on Dec. 1, and the markets have risen 15-20% since then. I also pointed to bullish trends in oil/gas stocks, and a top in the TLT ETF for Treasury bonds; I made a few bucks following those calls. On Friday 1/9/09 I bought some option calls on BAC (Bank of America), speculative bets that the stock (which closed at $12.99) will be significantly higher than $12.50 at some point between now and February 20th.

Once again, nothing here is investment advice; it is merely the free musings of an amateur.

So what's Bearish about this chart of BAC? I tried to find something and came up short. (heh) It all looks bullish: a narrowing of the Bollinger bands, a base of ever-tighter trading ranges even as MACD rises to the bullish neutral line, a compressed wedge setting up a big move up or down and a bullish cross for the 20-day above the 50-day looming.

Yes, banking is a lousy business, yes, the global financial meltdown is in full swing, etc. etc. But as noted above, headlines and economies correlate poorly if at all to market swings in Bear markets. But of course I could be wrong about everything here.

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--An anonymous comment about CHS posted on another blog.

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