Sunday, December 04, 2005

The Windup......and the Pitch!

As a new trading week approaches, most of the talk is about crossing Dow 11,000 (as if this is unprecedented; we were last there in June 2001). Clearly, given the market's strength since October 11th, it would be a psychological boost to the bulls to cross this threshold.

It could well happen. In fact, given the market chatter, it seems almost a foregone conclusion. But what if it does? What next?

There have actually been a number of breakouts over the past few years, and it pays to take a look at their respective "windups" (the amount of time they were forming before they broke out) and "pitches" (just how much oomph was in the breakout).

I offer below the Russell 2000 for the past three and a half years. I've taken the liberty of illustrating each major breakout, showing the length of time (in purple) and the subsequent rise upward (in green). Click on the image for a bigger version.

You've probably noticed a pattern already. With each successive breakout, the length of time gets shorter, and the subsequent strength (and its longevity) gets weaker.

I put these figures into a spreadsheet, and here are the results:

Breakout One - 522 Days - 15.13% rise
Breakout Two - 216 Days - 8.07% rise
Breakout Three - 187 Days - 4.88% rise
Breakout Four - 120 Days - ??? rise

The breakout (if we agree to call it such) just took place on December 1st. If past patterns are any guide, if the breakout holds, the rise we may see is a relatively wimpy 2.44%.

But more important is this - - the trend will eventually change. It is inevitable. No market keeps going up forever, and eventually, a broad uptrend becomes a broad downtrend. And how does that happen? By a market ceasing to make new higher highs and instead making lower lows.

So when a breakout fails - - when the pattern breaks - - then the trend, ipso facto, can change. So has the trend changed yet? I have no idea. But one thing is clear - if the past several years are any guide, even if the Dow breaks 11,000 and the markets keep heading higher, there sure isn't a lot of windup behind this particular pitch.

1 comment:

Mhashe said...

Hello Tim, hope to follow your blog with interest. Never realized you had a blog! Avid user.