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Why Barron's Prediction of Dow 16,000 Favors the Bears


A discussion of sentiment and psychology.

Do note that I'm not predicting a selling panic tomorrow, I'm merely noting that the sentiment precursors are in place, and a 20-year high in bullishness shouldn't be ignored. Since I always try to see both sides of the argument, though, I think it's also important to note that these types of sentiment indicators are purely relative, and that makes them difficult to time trades with. For example, I remember some contrarian investors talking about what a great time it was to buy equities in 2008 when the polls came in showing bears numbered around 60%. They said it again when bears numbered 65%, and again at 70%, and again at 75%... and so on. The market didn't end up bottoming until bears numbered over 90% -- so the key takeaway is that numbers which look extreme this week can end up looking mild by comparison in a month or two.

Moving on to the charts, I continue to feel it's more likely that this is a reaction rally and that bears will take the market back down again after it's over. The 10 minute chart shown next has a bit more detail about upcoming resistance levels.

It's worth mentioning that last Tuesday's projection (reprinted in the red breakout box below) has played out exceptionally well since. Hitting three turns in advance on a "best guess" isn't too bad -- especially considering SPX traversed more than 80 points during that time, and the market's now right back to almost exactly where it started (!). That projection correctly anticipated about 85% of the move in terms of points captured, as well as the correct turning points -- so if you traded that roadmap, then you probably did okay. Hope it helped anyway!

Click to enlarge

We'll see if the original road map continues to track or if Friday's slightly altered view comes to pass. On Friday, while I (correctly) projected the rally into the blue target box, I also slightly favored the idea that would mark the end of the upwards correction (see: More Warning Signs for Bulls). I noted that I didn't feel I could see "two turns down the road" at the moment, and what would happen after that rally wasn't entirely clear to me. After studying the charts over the weekend, it does appear there may be some additional upside momentum left, so I've noted the next resistance levels on the chart below.

Click to enlarge

In conclusion, last week I outlined a number of reasons why it appeared that bears were gaining control of the market, and I presently continue to feel that the current rally will ultimately stall and be sold. The preferred wave count shows this as a higher degree wave ii/B, which means that sentiment should remain bullish throughout this rally, and it will do its best to convince us it's headed to new highs. At this point, sustained trade above 1577 would indeed call the bear view into question. Trade safe.

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No positions in stocks mentioned.
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