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How Many Crosses Will It Take to Say Goodbye to Dow 10,000 Forever?


History offers us some clues.

The chart below shows the 1,000 level being eclipsed for the first time in 1972 - 1973. Clearly, there was a nasty 40%+ decline from 1973 - 1975. Although the Dow made several attempts at breaking above 1,000 in 1976 and 1981 - 1982, the breakout that lasted only occurred after the "12 over 24" crossover occurred for the third time in 1983. All the action from 1973 to 1983 was probably tradable for the most nimble and skilled of traders, but the net result for long-term holders of stocks was crummy at best until the breakout above 1,000 finally occurred following the third key moving average crossover.

Click to enlarge

So, that was two for two. Unfortunately, in modern market history leading up to the popping of the tech bubble and subsequent recession, those were the only two crash and recovery scenarios that occurred, so it's a small sample with which we have to deal. The theory behind the need for three key moving average crossovers is backed by common sense, however. After a complete train wreck like either 1929 or 1973, it clearly took a while to rebuild an investor base that "stuck." That's not only because of the obvious loss of capital that occurred on the part of investors, but also because of the loss of confidence that occurred. It takes years to build both of those back up, clearly due to the math involved in rebuilding the capital base from the financial perspective. But it also showed an apparent need for some type of economic or geopolitical catalysts to occur to give investors the confidence and/or resolve to stay invested. In 1942, it was the advent of war that spurred on economic activity and patriotism. In 1982, it may have been the very same factors (that time, it was Reagan's Cold War efforts versus the Soviets). For me (a technical analyst) to narrow it down simply to geopolitical events as the catalysts is too simplistic, though. I'm sure it had to do in part with other factors such as fiscal and monetary policies and other factors that may have influenced the "social mood." Whatever the reasons, the market finally exploded higher in each case after the third key moving average crossover. What about now? Let's go to the charts.

The chart below shows the Dow Jones Industrial Average from 1996 to current day. Once again, we see the initial breakout above the key technical level (this time 10,000) highlighted in the yellow box. We then got the initial bear market from 2000 - 2003 and the first "12 over 24" crossover that followed at the end of 2003. We obviously saw a low volatility rally that took the Dow all the way up to 14,000 (again, not unprecendented for such a rally to occur; recall the rally from 50 to nearly 200 after the 1929 - 1932 crash). Then, we saw the financial crisis-induced sell-off that took the Dow all the way down to below 7,000. The recovery that has followed generated the second "12 over 24" crossover, but has yet to bring the Dow to new highs despite once again eclipsing 10,000.

If the historical pattern holds true, we could be in for one more drop to slightly below 10,000 before it's all said and done. Given all of the headlines of the day, it's not hard to come up with reasons for such a decline. But let's not get crazy and try to convert our Mayan apocalypse bunkers into market-crash bunkers just yet. This information is just something to keep in mind so as not to get carried away with the bullish hype that frequently accompanies any 5% rally these days. All we can say here is that there's a realistic chance we see one more dip (causing the 12-month average to dip below the 24-month average) below 10,000 on the Dow.

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The bad news is that such a sell-off may take place. The good news for you is that there are tools out there to deal with that scenario unfolding and protect your capital.

Twitter: @tttechnalytics

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No positions in stocks mentioned.

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