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Next Stop, Dow 12,000?
It's always
entertaining to listen to some of the analysts out at the
extreme ends of the spectrum predict where an index will be
two or three years out. Currently the extremes of the forecasts
put the Dow Jones Industrial Index at 5,000 on the low side
and 20,000 on the high side. Now we'd love to see the Dow
at 20,000, but is that really where it is going? We'd also
love to see the Dow at 5,000 if we could identify the move
before it happens and we could short it all the way to the
bottom, but the accompanying social unrest might create a
lot of chaos in our lives. So where is the Dow headed? Few,
if any, have the tools to accurately predict where the Dow
will be in five years. For every forecaster who pounds his
chest because he got it right, there will be five that will
be looking for ways to restate what they said because investors
obviously didn't understand what they really had forecasted.
Predicting index levels five years out is fairly difficult,
if not impossible, but what hints do we have as to how the
Dow will behave in the near term? The Dow has run up to the
11,000 level over the past couple of days. The amazing thing
is the Dow over the past 7 weeks has run up to these levels
from 9,200 on March 22. A 20 percent gain in less than 2 months
is a great move in anyone's book! So where is the Dow likely
to go now? One train of thought says the Dow has significant
upside momentum and should continue higher. That's great if
you're studying the momentum of a crash dummy that just hit
a solid object at 30 mph, but it may not hold true for a stock
index that is at the top of its range. If you look at a chart
of the Dow for the past 16 months you'll see a number of interesting
events. On 1/14/00 the Dow ran up to 11,750 at the peak of
the market enthusiasm when it looked like the market and the
economy could do no wrong, and then it quickly moved lower
to the 9930 level as the euphoria wore off but the economy
looked strong. On 4/4/00 and 4/11/00 the Dow couldn't get
back to the January highs but managed to get to the 11,400
level intra-day while the NASDAQ was sending mixed signals
and the economy still looked reasonable robust. On 9/6/00
the market ran up to these same levels but sold off to the
9650 level 5 weeks later, in an environment where the economy
looked to be softening. The Dow again ran up to the 11,000
level once each this past November, December, January, and
February, when most companies were reducing their earnings
estimates and saying they saw weaker revenue and earnings
ahead. Now the Dow has run up to the 11,000 level again. Some
might ask what's wrong with this picture? There certainly
has been upside momentum over the past two months. But, the
Dow is at a resistance level that it hasn't been able to get
above the last four times it has tested it in the past six
months. Investors don't need to stay away from the markets,
but they need to be very aware of any market weakness providing
shorting opportunities, and just the same they need to watch
for a clear breakout and close above 11,000 on the Dow, especially
if accompanied by new highs in the other market indexes.
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