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Lessons of History


John Jeffery, Optionetics.com.au
September 14, 2007


To believe in the predictive power of analysis is to accept a couple of assumptions. First, you have to accept that the markets are not random. Second, you have to believe that what caused a share or index to rise or fall in the past will have the same effect in the future. You must believe that history repeats itself, that people will react the same way tomorrow as they did yesterday.

In my last article I raised the notion that the US market looked ready for a 2-year decline. If you believe in analysis, a careful monitoring of certain Elliott-based criteria will indicate the likelihood of this happening. That story has yet to be told, but the historical basis of analysis is backed by some striking similarities between two charts from different periods in US markets.

Chart 1 – INDU Daily Bar Chart

 

 


click here for more detail

The upper part of the split screen shows the current Dow Jones industrial index. A rally through May resulted in a double top formation followed by a consolidation period. In July, the bulls managed to break resistance and post new highs before a shoulder was formed. Then the neck line pierced and the market fell to lows in August.

The lower chart also shows the Dow Jones industrial index. A rally through May resulted in a double top formation followed by a consolidation period. In July, the bulls managed to break resistance and post new highs before a shoulder was formed. Then the neck line pierced and the market fell to lows in August. Sound familiar?

The only difference is about 17 years. The lower chart shows price action from the summer of 1990. If you believe that history repeats itself, the burning question is, “What happened next?”. The answer is in ProfitSource on the INDU chart. If you have questions about the power of predictive analysis, just take a look.

Stay sharp,

John Jeffery
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