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(12/30/11)
As I have mentioned in the past the Dow has never had a negative
year prior to a Presidential Election Year since World War II and this year was
no exception as it closed up by 5.5%. However this is the first time there
have been two consecutive occurrences in which the Dow has returned less than
10%.
| Year |
Return |
| 1943 |
13.8 |
| 1947 |
2.3 |
| 1951 |
14.4 |
| 1955 |
20.8 |
| 1959 |
16.4 |
| 1963 |
17.0 |
| 1967 |
15.2 |
| 1971 |
6.1 |
| 1975 |
38.3 |
| 1979 |
4.2 |
| 1983 |
15.8 |
| 1987 |
2.3 |
| 1991 |
20.3 |
| 1995 |
33.5 |
| 1999 |
25.2 |
| 2003 |
25.3 |
| 2007 |
6.4 |
| 2011 |
5.5 |
Naturally the question is what does the market do now?
From a Wave Analysis perspective there was clearly a 5 wave move down from the
1371 high in the S&P 500 which bottomed at 1075. So either this
was Wave 1 of a larger 5 Wave drop or "A" of a less severe "ABC" type correction.
If this initial move down was Wave
1 of a large 5 Wave affair then the current rally would be a Wave 2 of 5 bounce.
Naturally once the Wave 2 of 5 bounce ends then Wave 3 of 5 would develop followed by Waves 4 and
5 to complete the pattern at some point in 2013.
Thus this would eventually lead to a retest of the prior March 2009 low as the
entire move from the late 2007 would evolve into a large "ABC" type corrective
wave.
Furthermore if we look at a historical chart of the S&P
Composite using a log scale notice the longer term upward trend line (blue line)
and the trend line connecting the 2002 and 2009 lows (green line) coincide in
the mid 600's. Also notice the 61.8% Retrace from the mid 1970's low to
the late 2007 high also resides in the mid 600's as well so this area is clearly
a major long term support zone.
Meanwhile an
alternative count would be that the move down from 1371 is evolving into a
simple "ABC" correction such that "A" bottomed at 1075 while
the current move up is "B". Once "B" ends then
"C" would occur with a drop back to the 1000 to 936 range. The 1000 area is near the 50% Retrace from 667 to 1371 and
is where the S&P 500 held support at in July of 2010 (D) while 936 is the
61.8% Retrace from 667 to 1371. Naturally if this pattern were to
pan out then the previous low made in March of 2009 would never be
retested.
A similar
"ABC" type pattern did occur from the early 1930's through the early
1940's as the S&P Composite never did retest its prior low made in 1932.
 Finally one of the
more ominous looking chart patterns at the moment involves the NYSE Composite
which shows a potential Head and Shoulders Top pattern with a well defined
Neckline (blue line). Thus the Neckline support area around 6500
will be a key level to watch in 2012. 
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