9 Post No:Why did I rehash the painful events of the past?

Because it is important to keep in mind how the market responded to events. Just like we look at previous prices to measure moving averages and volatility, we must also retrace previous market sentiment. Now let's consider some basic trend analysis. As you can see, the Dow made an all-time high in October 2007. Since then, it has made lower lows and lower highs, typical of a downward trend. But how far and how long will this bear market last? First of all, we need to remember that the previous bullish rally was quite fast, occurring over about 20 months. In fact, the lion's share happened in 6 months (May to October 2007) for about 18% gains. What does that mean? Well, in my opinion, it means the bullish rally was not that valid. Remember, price validity strengthens with time.

If we look where the Dow is now, it's easy to see that it hit some fairly strong support around the 10,800 range. However, this support was just prior to the previous bull run which began in early 2007. In other words, if in fact, the previous bull run was an artifact, it is likely that the Dow has a way to go down before any long-term trend reversal.

Next we examine a 14-month chart of the Dow. As you can see, I've drawn the upper and lower trend lines. The dashed lower trend line illustrates very short-term extreme selling pressure I typically dismiss as noise. But as you can see, we've encountered three of these periods thus far, making what I would normally consider to be noise an important consideration.

The big question is where will the market head over the next several months. No one knows for certain, as this depends upon many variables and the timing of these variables. All we can do is look at the possibilities. The first thing I will say is that, based upon the three previous periods of extreme selling pressure, it is likely that we will see additional periods of these brisk sell-offs, but only if the downward trend remains in place. As for the downward trend, currently the Dow is trying to mount a strong rally up from the previous oversold level around 10,800. This rally was triggered by the Fed's bailout commitment to Fannie and Freddie, as well as additional positive news in the financial sector. Therefore, barring any further catastrophic events over the next several weeks, it looks as if the market could continue the current rally. But by how much and for how long? Once again, it is impossible to say without knowing in advance several variables