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Weekend Stock Market Analysis

(3/28/09)

From October of 2007 through early March of 2009 the Dow lost 54% of its value.   Some other notable drops going back to 1896 include 1906-1907 when the Dow lost 49%,  1929 (-49% in 3 months), 1931-1932 (-79%), 1937-1938 (-50%) and 1973-1974 (-48%).   After these substantial drops these were followed by sizeable rallies which included +89% (1907-1908),  +52% (1929-1930), +375% (1932-1936), +64% (1938) and +80% (1973-1974).   Thus as you can see there have been some impressive Rallies after the Dow has fallen around 50% in the past.      

Since the early March Lows the Dow has gained 22.5%, Nasdaq (25.4%) and S&P 500 (24.7%) in 14 trading days which is equivalent to 3 trading weeks.   The overall pattern we are currently seeing is rather similar to what occurred from 1937 through 1938.   A weekly chart of the Dow from that time period is shown below.   The first thing to notice is the Elliott 5 Wave pattern that occurred from early 1937 through the early part of 1938 in which the Dow lost 50% of its value.   After Wave 5 (5) completed this was followed by a an ABC type corrective rally.   The "A" Wave up had a 5 wave structure to it as the 1st Wave up 1 (A) saw the Dow gain 25% in 3 weeks.  This was then followed by a minor abc type pullback for Wave 2 down (2 A) in which the Dow dropped back to its 61.8% Retracement Level for a 12% correction.   Next Wave 3 up (3 A) occurred in which the Dow gained 36% in 10 weeks as it stalled out right at its 50% Retracement Level calculated from the 1937 high to the 1938 low.   This was then followed by another minor abc type pullback for Wave 4 down (4 A) in which the Dow lost 12% again before the final 5th Wave up occurred in which the Dow gained another 24% before peaking at its 61.8% Retracement Level near 158 which completed the "A" Wave up.   Overall from the low of Wave 5 (5) in early 1938 to the high made in late 1938 the Dow gained 64%.  

Now let's look at a current chart of the Dow.  Notice the same type of Elliott 5 Wave pattern occurred from late 2007 to the final Wave 5 (5) in early March in which the Dow lost 54% of its value.   Over the past 3 weeks the Dow has rallied just over 22% so its possibly it may rise another 3% or so before we see completion of Wave 1 (A).    This would then be followed by Wave 2 (A) down which would be a minor abc pullback with support coming in either at the 50% or 61.8% Retracement Level.   Once Wave 2 (A) ends then a strong Wave 3 (A) would occur with the Dow potentially rising back above the 9000 level at some point later this year if we did see a repeat of the 1938 pattern.       

Meanwhile if we take a longer term look at the Dow from the late 1930's through the early 1940's notice once the "A" Wave peaked in late 1938 this was followed by the "B" Wave down in which the Dow dropped 24%.   Then after the "B" Wave pullback the Dow rallied again but stalled out just below the peak of Wave "A" as it completed Wave "C" to the upside with a gain of 31%.   Meanwhile once the ABC corrective rally ended then the Dow went through another 5 Wave pattern to the downside before finally making a low in early 1942 just below the low made in early 1938 as it fell 42% from late 1939 through early 1942.   

So far the period from late 2007 through early 2009 looks rather similar to the period from early 1937 through early 1938 so it will be interesting to see if the same type of pattern occurs once again in the years ahead.   At this time I know many investors are frustrated because they missed the rally over the past 3 weeks.   However if we are seeing a 5 Wave pattern developing for Wave "A", as mentioned above, there will be plenty of opportunities to reenter the market after we see a substantial pullback occur.  

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