But, are any of them right? Well, let me put it this way:
NO!!! If any one of them had any "chart sense" they would
understand that, so far, all this is a very mild correction.
(Anything less than a 30 percent pullback level is considered
very mild.) Why, we haven't even retraced a "mild" Fibonacci
38.2 percent at this point.
Can it get worse? Of course it can, but so far it hasn't.
And until we see a Dow of 12,500 or so, this is all just a
pretty run of the mill pullback. So, until then, I really
would appreciate it if the prophesiers of doom would please
just crawl back into their corners for a bit! (Of course, they
won't. I know that. Just felt good saying it.)
Oh, yes. Who (or what), you ask, is "Fibonacci?" Well, let
me tell you a bit about this 1200 A.D. math guy. First of all,
Fibonacci is the man that introduced the western world to the
then Arabic math model, the 1,2,3,4,5,6,7,8,9,0 base we all
use today. Pretty impressive!
But, it was a 1900s man named Elliott, who published
several books on stock price predictions in the 1940s, that
made the name of Fibonacci famous to chart and stock technical
types everywhere. Elliott (influenced by several early 1900s
math writers) found that the work of Fibonacci (pronounced
Fib-on-notch-ee) fit perfectly into his "five wave" stock
pricing model.
Then in 1980, a man named Bob Prechter published all of
Elliott's writings in one book and used this book to promote,
quite successfully for a while, his own prowess at calling
market activity using Elliott's model. But, Prechter missed
calling the 1987 crash and lost most of his admirers (a very
fickle bunch these investors!)
However, the model Elliott set up and Prechter promoted is
today still watched closely by chart types like me everywhere.
Here is a compressed explanation of what it purports. Prices
for stocks move in five "waves." Each wave's end price can be
predetermined by the use of two important percentage numbers.
I won't go into how the percentages are used, just that they
are 38.2 percent and 61.8 percent. Technicians also watch the
50 percent level, too, though it is not actually part of the
Fibonacci model.
These three percentages very, and I mean very, often can be
found as the support levels of pullbacks down from rallies or
resistance levels in temporary rallies up in a downtrend. You
may question this model, but let me tell you that it works
plenty of the time. I don't know if it is because Elliott
(using Fibonacci's work) was right or because since so many
investors are watching these levels so closely it becomes a
self-fulfilling prophecy that these levels work. All I know is
that they work, so the why is of little importance!
Okay! I can hear the rebuts from the current bad mouth
crowd, even as I write this. "Well, Whitmore is one of those
"chart" guys. They never look at the 'real' facts about
companies, just look at the scratching on some chart. They
miss the whole story about a company. What a waste of time."
Or, "Whitmore just doesn't understand this business. Charts
are just a small part of things. Why, he probably can't even
tell you what IBM's second quarter sales are or its earning,
for that matter." And, I suppose, there are probably a dozen
more rebuttals out there that I just can't think of right now.
[Editor's Note: Buffett,
Soros, Templeton, Rogers: Learn Their Money-Making
Secrets.]
Well, let me tell you something about charts. Every price
mark on a chart occurs because thousands, sometimes millions,
of investors have put their money where their mouth is! They
either bought or sold a stock. I really don't care what IBM
second quarter sales are (they were $23.8 billion with $2.26
billion earnings, so there), what really counts is where the
majority of orders are originating, whether with buyers or
sellers. If buyers, you want to be a buyer. If sellers, you
better be a seller, too. That is the bottom line.
Right now, the stock market is pulling back after a record
breaking up move. In other words, buyers have become sellers
for now and prices are falling. What else would they do, pray
tell? Folks are just "locking in" some profits. Nothing wrong
with that at all. What is important is how long the
profit-taking lasts and how far back prices pull while
investors do take some profits.
The rally that began in July 2006 went from about Dow
11,000 to Dow 14,000, a huge, record stomping, gut wrenching,
whopping 3,000 points, nearly a 28 percent climb without
hardly a breath!
Now, there is finally a pause. Looking at Fibonacci's three
numbers, it is only a very mild pullback if we were to drop
only 30 percent of the gain to Dow 13,100. At the Fibonacci
number 38.2 percent, which would qualify as a mild pullback,
it would be to about Dow 12,750 or so. If we see a "fairly
standard" pullback of 50 percent (not a standard Fibonacci
number, but closely watched by investors, as I said) the
pullback would be to about the Dow 12,500 level.
Now, falling below the DOW 12,500 would finally be classed
as a bit of a white knuckle experience. The 61.8 percent
number, a crucial level, is about Dow 12,150 or so. If this
level were to break, the "chart" guys (including me) would
then begin to tell clients to take major protective measures,
ones like increasing cash levels in the portfolio by selling
some stocks, or using puts to protect the portfolio, etc.,
because, at that point, we may be in for a very big decline,
quite possibly a very big one.
I have said this before, so forgive me for being redundant,
but you need to understand this fact about chartists. We will
never buy at the exact bottom or sell at the exact top. We
will miss the first 10 percent or so of a rally or lose the
first 10 percent or so of a decline. All we try to do is get
the middle 80 percent or so in the bank. Seems like a good,
measured risk way to do things, if you ask me.
So, until we break the crucial 61.8 percent level at Dow
12,150, the only steps I would recommend if you wanted to
protect portfolio value right now might be to spend a bit of
your cash funds on some short selling of the NYSE Spyders (a
proxy for the Standard & Poor's index) in a sort of
insurance measure.
In this instance, your shorts profit while your stock
holdings lose value, a type of "freezing" of the portfolio
value, if you will. Option puts on the Standard & Poor's
index can also accomplish the same effect. But, until we see
this "crucial" level, there is absolutely no reason to talk
doom and gloom or to "run for the hills."
Believe me when I tell you that you are going to hear every
argument to "run" that is out there while this pullback goes
on. So, be prepared. You will hear how a falling dollar will
destroy us (see my report last week for my thoughts on that
one), or that the economy is way too soft for the market to
continue up (poppycock, it will go up if there are more buyers
than sellers, PERIOD!).
Or how about, "Interest rates have to go up or the economy
will never be able to fund its huge debt." Oh, come on! That
one has been out there for 8 years or more and the demand for
U.S. Treasuries is as strong as ever. Do you think debt buyers
see better debt to buy anywhere, and in the volume that we
offer, or with the amount of true assets backing them up as we
have, or with the political stability our government offers
investors when they look around at other countries? Get real
here!
Need I say more? If you think so, I suggest you go to cash
in your portfolio right now, because you are fair prey for the
doom and gloomers and only a totally cash position will make
their words of little importance to you.
[Editor's Note: Discover
the Next 4 Safest Places to Stash Your Cash. All Guaranteed by
the U.S. Government.]
Now, since I am a "chart guy" I am including my Whitmore
Super Chart of the Dow since mid-2004 for your review.
I have marked the 30 percent, 38.2 percent, 50 percent, and
the rock bottom 61.8 percent levels for you to watch over the
next couple of months. I have also marked my Super Chart
Keyline (currently at Dow 11,838) which is the point at which
a major market reversal truly begins in earnest.
This Keyline has called every major market reversal since
1965 when I first began its development. If you want a big
picture of the chart, go to my archives at Moneynews (Experts
Corner) to open the chart only and print it out on your
printer. Paste it up right where you can see it often and that
way we can watch together what the market tells us.
My own view is that the pullback will last 4-7 weeks, quite
possibly, but it will hold the 50 percent level (12,500) at
its worst pullback level. But, I am only guessing, you know.
But, it is a guess that has 40 years of experience in reading
charts behind it. But remember, it is still just a guess.
And before I leave today, I want to once again send you to
my column of April 13 (see my archives) that called for the
S&P target in the then on-going rally to be about
1520-1540 (cash basis). We actually hit 1552 as a high before
the current pullback began.
And even more important, see my May 13 column. In that
column, I am calling for a Dow of 19-20,000 in the next 3 1/2
to 4 years. And I, again, fully endorse this forecast. So, you
better be watching to see if the base of this pullback does
form over the next 4-7 weeks. And if it does, better plan on
how you will take advantage of the potential 6-7,000 point Dow
rally that is surely coming. Now, put that one in your pipe
and smoke it. (Wait, that was what they used to say. People
don't smoke pipes any more do they?)
Well, that's all for this week. Hope your coming investment
week is a good one. In the meantime, you keep in touch. I do!
See you next week!
Editor's Notes:
