The Final Breaths of the Dying Stock Market Rally: Candlestick Reversal Pattern Tells the Story

The stock market High of 2000 was a repeat of the stock market high of 1929, except that in the scale of things it was one degree larger.  It has been said that “History doesn’t repeat; it chimes.”  If so, then the sound that was heard in the crash which followed 1929 was that of a small child’s drum, while the sound that we will soon hear will be that of a mallet pounding on the largest drum in the orchestra.

The Dow Industrials Index made a High of 9917.30 on September 23, 2009.  The Candlestick price bar of that day was a “bearish engulfing” pattern, in that the “real body” of prices on that day (which resulted in a black candle) “bearishly engulfed” the real bodies of prices of the preceding four days.  This pattern was a signal that we can expect lower prices.

Let me offer an analogy which might help in understanding the differences in scale.  Imagine that it is October 1929.  A boy is standing on the sidewalk, playing with a tennis ball.  He holds the ball at eye level, and then just lets go and allows it to drop.  The ball hits the sidewalk and bounces, up to the boy’s belt line (in March 1930), and then falls back to the sidewalk, to a low in 1932.

Now it’s year 2000.  The stock market is at a new all-time high.  The boy’s grandson is standing on the sidewalk, playing with a tennis ball.  He holds the ball at eye level, but instead of just dropping it, he slams it hard onto the sidewalk and it bounces, not just up to the boy’s belt line, but way up over his head (in October 2007) and then it starts to drop.  That’s where we are now.  The ball is on its way down.  You know that when it hits the sidewalk it will be traveling at a higher rate of speed than that in the first example.

The Rally of 2009 is just a blip in that descent.  It hasn’t changed a thing.

Stock market bull rallies within underlying bear markets are instruments of deception.  They hypnotize the investing public into believing that “recovery is here” and that “the worst is over.”  Typically, at their end even the experts, the “elect,” the chronic bears, will be won over and will succumb to the allure, whereby they join the herd on the run to the cliff.  It happened to Isaac Newton, a very bright man, in the South Seas Bubble; it happened to super-bear investor and market analyst Robert Rhea in 1930; and it has happened now in the person of a usually-bearish Nobel-prize-winning economist who has thrown in the towel by turning bullish at precisely the wrong time.

We note other evidence of the end of this stock market rally, in the form of a repetition of the old merger and acquisition mania:  Kraft sets up a hostile acquisition of Cadbury-Schweppes; Hewlett-Packard makes a big buy; Xerox makes a big buy; Abbott Laboratories wants to buy a Belgian company’s prescription-drug business.  All of this busy-ness is emblematic of a stock market peak and impending reversal.  “They’ll do it every time.”

I think it’s quite possible that the Dow Industrials’ high at 9917.30 on September 23 is the highest we will see the Dow for many, many a moon, if ever, in our lifetimes.  I have posted on my blog a forecast of the S&P 500 at 500.  It will quite some time before the S&P gets there, but it’s on the way.

William Kurtz

September 29, 2009