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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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