By William Kaiser, ZAP Futures
They say if you remember the 60's, then you weren't there. The Rolling Stones, the Beatles, low consumer confidence, record housing starts, a bear market bottom and anti-war protests. Stop…we're talking about 2002-2003! Déja vu! This past year, aside from seeing the Rolling Stones, Paul McCarthy and anti-war protests, I have seen other similarities with the 60's. For instance, consider the extremely low consumer confidence coupled with the reality of good economic numbers. This is very bullish to me for two reasons: market bottoms are usually made when the public is the most bearish and bullish fundamentals should fuel the market for at least the next 6-18 months.
From a technical perspective, if we take a look at the bottom of the Bear Market in 1966, (See Figure 1) it is very close to the bottoming pattern of our current Bear Market (See Figure 2). On 7/23/02 the Dow made a low of 7679, followed by another low on 10/10/02 of 7170. What followed was an impressive 24.4% rally to a high of 8920 on 11/27/02. This chart pattern is called a W.H. Moore Bottom. This pattern occurs when a market makes a new contract low (7/23/02), rallies for a short time, makes another new contract low (10/10/02) but has no follow through and then rallies sharply with gaps. Most of that rally has since faded in the 1st quarter of 2003 as a result of war fears and higher oil prices weighing on the markets. However, if we are to assume that we have already made a bottom in the market last October, we must look at this as one last buying opportunity.
Figure 1
Figure 2
From a fundamental perspective, I can offer many reasons for an economic recovery. Look at strong housing starts, good GDP, low interest rates, Fed adding liquidity, strong consumer spending, the highest productivity levels in decades, improving corporate earnings, strong business investment and industrial production. Sure we can look at the negative fundamentals, threat of war, high oil prices and low consumer confidence, but my belief is that most of those elements are already factored into the market at these levels.
So where do we buy and where are we going? A congestion pattern has been forming between 7700-8150 basis the March CBOT mini-sized Dow contract. There is also a gap in the charts at 7500-7570. I would buy on a move down into the gap area with a stop below the October 10 low. If we did not fill that gap, I would wait to buy a breakout above the highs of the congestion area, around 8150. If we do fill the gap and then take out the 8150 highs, I would buy one at each level. If we do see this market go higher, the second leg up is generally more reliable and usually rises 20-40% more than the first leg. The first leg was 1750 points, so projections for high of the second wave would be 2100-2450 points, or the Dow with a high between 9700-10,050.
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About William Kaiser
William Kaiser has been in the Futures Industry since 1968, starting his futures career on the trading floor of the CME & CBOT as a runner. Over the years since, William has been a daily commentator on CNN/CNBC Television, presented numerous seminars, written many articles for industry publications and co-authored the book "The Art of Electronic Futures Trading" published by McGraw-Hill. Currently he is President of ZAP Futures, the first to offer self-directed electronic futures trading to the public and today is one of the largest firms in online futures trading.
If you would like to receive a free copy of the 260-page McGraw-Hill book, "The Art of Electronic Futures Trading", please visit Zap Futures website at www.zapfutures.com .
