2010 Crash: The March 2009 Lows Will Not Hold

January 28, 2010Marketsby KeithTimimi

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Dow Jones (DJIA) Trend, March 2009 to January 2010

28 January 2010. Juan Abdel Nasser, EconomyWatch.com. Just over 3 months ago, on the 26th October 2009, I said that stock markets were experiencing a sucker's rally. I predicted that a new bear market would set in during the first quarter of 2010.

28 January 2010. Juan Abdel Nasser, EconomyWatch.com. Just over 3 months ago, on the 26th October 2009, I said that stock markets were experiencing a sucker's rally. I predicted that a new bear market would set in during the first quarter of 2010. I was mocked in some quarters, as skeptics usually are during bullish times, but sadly I have been proven right.

Most economists - at least not those blinded by either dogma or an over-reliance on quarterly data - who made a fundamental analysis of the state of western economies, could not help but feel that the sense of escape from calamity was a bit premature. If you looked at unemployment, housing, commercial property, business order books,  lack of credit and abundance of debt, there was no doubt that we were still in deep trouble.

But truth be told, what gave me the courage to stick my neck out and make that bold prediction was the work of our favourite (and slightly mysterious) long-term technical analyst, Simon, who goes by the name Futures 618.

Simon likes to focus on signal and remove noise. He doesn't let on too much about which is which, but he has an excellent track record in predicting broad trends. And what he has to say now is as scary as it is important.

The rising wedge pattern that indicated a sucker's rally for the DOW (Dow Jones Industrial Average of the top 30 companies in the US, or the DJIA), has been confirmed. Look at the chart above and you will see that there has been a strong move downwards at the end of last week, followed by a sideways movement in the last few days.

This break down through the lower limit of the rising wedge pattern has been confirmed across virtually every technical indicator - take a look at the DJIA at StockCharts.com to see what I mean. The index fell through the 50-Day Moving Average (50DMA) - and stayed there. Trading volumes were above recent averages. Various flavours of RSI and MACD all turned sharply negative.

In fact the move was so bearish in tone that Simon has revised his forecast downwards. He says

Equity markets have turned more bearish this week and unfortunately the March 2009 lows will not hold.

Which means that we have a long way to fall before we turn around. In fact, we could see a 40% - 50% wipe out.

There is a precedent. During the Great Depression there was a very similar move up to the one that we have just seen. Sadly, the 'bottom' did not hold - in fact the true market low was another three years in the making.

Other markets are showing similar patterns. Both the Global DOW tracker and the All Ordinaries index have broken down out of their rising trends, signalling pain across the board.

China is in a fascinating position. The Shanghai Composite Index (SHASHR) actually peaked around the end of July 2009, had a sell off, recovered, and has been trending sideways since November.

It too has broken down out of this trend, but under a slightly different dynamic.

Worried about the vast amount of money that was pumped into the economy last year, the Chinese Government has started tightening credit in a bid to cool the market. It has increased reserve requirements, worried about an increase in loan default rates. It has also started to guide banks away from lending to over-developed and energy-intensive industries, and may start raising interest rates soon. Not surprisingly, that has led to a bearish sentiment in the market. The seven straight days of losses is the longest such run in Asia for two years.

As David Caploe, our Chief Political Economist at EconomyWatch.com recently pointed out, a vast amount of negative economic news came out at the end of the year and was 'buried' in plain sight by being reported in the festive season.

Add that to tightening in China, last year's major growth engine, and you can see that we are in for a bumpy year.

It may not be that surprising then, that Simon sees a strengthening rally in the US dollar, a traditional flight-to-safety move, while the Euro and Australian dollar are turning negative. That other great defensive play, Gold, had a great 2009 and many see it performing even better in 2010.

Sorry to be the bearer of bad news, but it is what it is.

Until jobs start being created in the US and Europe, western consumers won't start shopping, and China and other export-dependent Emerging Markets will have nowhere to export to. Without that kind of real economic growth, stock market rallies can only survive on vapour for so long before crashing painfully back to earth.

Juan Abdel Nasser

EconomyWatch.com

 

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