Q: What's your prediction on when a retest of the old lows will happen and what level are you projecting? And what do you mean by capitulation, a term typically associated with market lows, not market highs?
A: First, the word capitulate has been used, in many instances, in the wrong way. According to the Online Etymology Dictionary, the wordcapitulation originally meant “an agreement.” Capitulation later morphed into the modern word that means “to surrender.” In either case, capitulate means that two sides come to terms, reach an agreement or one side surrenders to the other.
When the folks on CNBC use the word capitulate, they blatantly show their bias for “the bulls” (you knew this already) by using the term capitulate to show that they want “the bears” to "surrender." So popular has the term capitulate been used to refer to the bears surrendering that the new meaning is to give up at the bottom of a bear market move.
As you read the beginning of my article on October 15, 2009, you’ll notice that I said that Dow Theory is all about confirmations. Confirmation is another kind of agreement. In this case, the Transports have retained a classic non-confirmation of the upward move in the Industrials. That being the case, capitulation (in this instance) means that either the Industrials confirm by falling instead of rising or the Transports rise instead of falling. Again, capitulation is what we’re seeking, regardless of the direction.
Dow Theory doesn’t attempt to provide a time frame for when a particular event is going to take place. However, doing some cycle analysis points to the possible lows we might see in the near term.
There are two types of new lows that I see for the future of the Dow Industrials. The first is based on the premise that the Industrials can maintain the current upward trajectory. In the chart below, I have indicated point A and point B. If the market falls below the red trendline then we could see the Industrials fall to the corresponding X, Y, and Z levels on the way to 8100.
The second type of market low is based on the premise that the Dow fulfills the Wave principle and falls below the upward trending line (red) to the old support level 8100 and then 6440. A true Wave move down to the old low would bring the market below 6440. However, the last time this was fulfilled, in the period from 1970 to 1974, the market only fell 8.5% below the previous low of 631.16 on the Dow Industrials in 1970. Additionally, the Industrials ran up from 631.16 in 1970 to 1051.70 in 1973, an increase of 118% of the previous peak. As more time passes I expect the index to fall to 5474 if we do manage to complete a Wave formation on the downside.
After I ran the numbers, the cycle analysis method indicates that from January 24, 2010 to February 15, 2010 is the next expected low. From a purely technical analysis standpoint, the lows are expected between the December 9, 2009 and March 1, 2010. It is interesting to note that both methods arrive at a similar time frame. Therefore, we should be willing to accept the most conservative estimate and that would be the period from December to March.
In my last attempt to divine the future, on April 3, 2009, I had said that the Dow Industrials would be at 10,360.02 by late August 2009. In that same posting, I said that the Transports would be at 3,748.40 by mid-October 2009. I came pretty close on all accounts. This was done using the cycle analysis method mentioned above. Again, the projections that I’m making are haphazard guesses at best.
Finally, cycle analysis, the Wave principle and technical analysis in general are not part of Dow’s Theory for reading the overall trend of the markets. Although I can make a convincing case that they are all derived from Dow's observations. Such a flippant remark will have to be explained at a much later date.
