Saturday, October 14, 2006


Nobody but nobody has ever give Guambat any credit or praise for his technical analysis of the markets, and with good reason, no doubt. And Guambat is as sceptical as the rest when it comes to trying to find analogies of past patterns that in any way predict future patterns. With all that in mind, Guambat remains fascinated with the diversion of gazing at stars, stirring tea leaves and rearranging chicken bones, such as the following.

(click to enlarge)

This is a monthly chart of the DJIA, going back about 40 years. The long black rectangle in the lower right of the chart captures the roughly 20 bear market of the sixties and seventies.

Inside that is a smaller yellow rectangle that captures roughly the first half of that big bear.

Now consider that many technicians have, since the beginning of the millenium, warned that secular bull and bear markets take a couple of decades to play out, and that the bear market that began in 2000 would ultimately be the start of another secular bear market, notwithstanding the likelihood of cyclical bulls and bears along the way.

I have the feeling that markets today cycle differently than in the past, what with the highly diffused intelligence of market behaviour that average investors of years gone by didn't have. It's an iteration thing.

Still, I suspect that business cycles as such have not been eliminated.

With that in mind, compare the yellow rectangle from the 60-70 bear market with the market pattern since late 1997. Both contain similar time frames. And both "eyeball" as similar price patterns.

Notice how the stochastic high in '71 was higher than the one in '72-'73, though prices were higher in the latter time frame (thus bearish divergence that ultimately proved correct). Notice the stochastic high in 2004 and where it is now when prices are higher (thus, more bearish divergence?).

Argue what you will about how the two rectangular times may differ, the real question is, to the extent they may be similar, what of it? Can it possibly have any rational implications for the future? Those "analysts" constantly looking for and trotting out "analogies" like this seem to think so.


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