Yesterday, I was searching for some more examples of the 50 percent pullback phenomenon as a technical analysis trading tool. The most glaring of these we have just experienced. The high in the Dow Jones as 14,280, The previous low going back to our 2002 lows began the last bull rally. The low in 2002 was 7280.. During the meltdown last year, we had a pause in the sell off at a specific point. That point was at the 10780 level.
Look at a chart, and you will see, we spiked down to that level in Sept of 2008. We had a flurry of buying there, and in fact, at the time, it looked like that might be the end of the sell off. I remember speaking to Phil Flynn, the Oil Analyst who is on CNBC from time to time. He and I were both amazed that that level had held and we had rallied from there. We rallied about 500 points, about ten trading days, before we started the fresh move lower, ending eventually in the March 09 low. So, while it was not the stone cold low, by any means, a 500 point rally in the Dow is worth 2500 dollars for every mini Dow future contract you might have been long. If you had used trailing stops, you certainly could have locked in profits. Also, when that level was breached significantly, that in itself was a fresh sell signal.
When the market broke down below it the second time, we were headed for the next important retracement, which was the 62 percent retracement. When that level did not hold, a lot of programs started selling heavily, accelerating the decline.
The point is, the 50 percent rertracement level is something you have to watch if you are trading. Period. It it fail safe? Absolutely not. But it attracts activity as the market is going about its price discovery.
I believe whole heartedly that it was exacerbated by the program trading out there, not to mention the situation where the yield curve inverted to a point where no one ever thought it could have been.
A Euro Dollar Trader I know who has been phenomenally successful showed me a graph of what the futures were telling the world back in March of 09 at the bottom of the Panic. What was happening was not supposed to happen, unless there had been something like a Nuclear War. No one really knew how to price any sort of debt at that time, so it exacerbated the sell off to the downside.
At that time, people were talking about Dow 3000, and actually, a lot of people thought it might occur. We had fallen 6500 points in just 11 months. With the Dow at those levels NO ONE knew where the bottom was. I don’t care what advisory service you had, None knew where the bottom was. If they tell you they did, they are cannonballing bong hits with hits of acid.
When the market bottomed out, and started rallying, very few people called a 50 percent retracement… But guess what? 10300 is a 50 percent retracement of the down move from 14280 down to 6500. Take the high at 14280, subtract the low at 6500. That gives us roughly 7800 points. 1/2 of 7800 is 3900 points. 6500 plus 3900 is 10300. Amazing? Not really. Just a pattern that shows up over and over again, on daily, weekly and monthly charts in all kinds of markets, from Malaysian palm oil to milk futures.
Now that we are at the 50 percent retracement level, people are getting bullish again. No one knows if we could have a new leg down or new leg up, but if you pay attention to the combination of technicals and fundamentals, there should be a few tell tale signs, as we move into the first quarter of 2010.
This is exactly what analysts are looking at now when they are trying to figure out what a rally in the Dollar might look like. I did a rough estimate a couple of entries ago. The dollar looks like it has a sustainable target at the 80.50 levels, because it the 50 percent pullback of the 12 point down move which started from the Dollar’s highs last March at the 89 level, and extended down to our recent lows around the 74 level.
I have learned that the best and most powerful technical analysis techniques are the simplest.
Have a good weekend.