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2009 Market Predictions!

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The market is the market, regardless what you want to use as the market.  You can use Dow Jones Industrial Average, S&P 500, Russell 2000, etc.  Most individual investors that don’t follow the market very much will use the Dow Jones Industrial Average as the market because that is what is most highlighted in the media.  Most Professional investors will use the S&P 500 as the market.  Regardless of what you use we are all wondering the same question, when will the market hit the bottom?

First, I am going to analyze both the S&P 500 and Dow Jones Industrial Average to figure out where the bottom will be.  I used a Log based 2 and a monthly units for my charts.  I repeated the charts with a Log base 10 and got very similar results.


The above picture shows the S&P 500 from the years 1950 to present and the Dow Jones Industrial Average from years 1928 to present.  On these charts you will see a price channel lock trend lines with the support level in orange and the resistance level in green.  You will also notice price levels that I have markets with dotted lines.  The S&P 500 chart has the price levels of 550 and 600 while the Dow Jones Industrial Average has price levels at 4000 and 5000.

As you can see I have drawn a price channel lock where it appears to be a support level and a resistance level.  As we have noticed this resistance level was broken during the Roaring 1990s and took a small dive toward the resistance level again.  This dive should have brought the market all the way back down to resistance due to the overpriced securities.  What happened in stead was interest rates were reduced to expand credit during the early 2000s, which cause the market to expand to the levels at which they were at before the dot-com bust.  This just delayed the inevitable of the stock prices to get back on their “normal track.”  Because the markets were so overly bought the price is going to have to come all the way back down to the support level to even think of a possible bottom.

There may be a small period of time where the prices may go below the support level because of the fear and over reaction of the people.  If this happens, this would be a small period of time of a month or so.  This would be where many investors will find it to be an extremely good buy and start buying the stock again, for example what may have happened to the Dow Jones in the early 80’s.

As you can see I have two trend lines on the Dow Jones, one using the 1975 low as part of my trend line, stating that in the early 80s there was a time where the market was oversold.   This was quickly corrected by buyers coming back in the market.  The other line is where I use that low from the early 80s to make my trend line.  On the Dow Jones I like the bottom of 4000 for two reasons.  First, I like the 4000 mark because it is right in between the two support trend lines I have drawn.  Second, I like the 4000 mark because during the early to mid 90s this level was a resistance level.  Many times resistance levels can become support levels in the future.  I think that it will hit this bottom level and go sideways for a little bit until the bottom orange support line reaches the 4000 mark (currently at 3500) which should be within this year.

Looking at the S&P there is a very similar trend.  Why did I put up the 550 and the 600 levels?  The main reason is because the Orange support trend line shows that it crosses at 550.  The longer we wait (in months) to come to this level the closer it gets to the 600 level.  As we have seen on the Dow Jones the support level crosses the 3500 mark and we find a big support level at the 4000 mark.  Markets tend to follow similar patterns, so if the S&P will follow what the Dow Jones does then it will do something very similar to what I said above.

Now, one may be wondering how long this will take until we hit the new lows.  Well I can say that we will hit these new lows somewhere in the next 12 months.  Because information travels a lot faster than it did in the past I think it will hit this bottom sometime sooner than later this year.  As more and more investors believe that the bottom should be at these levels this will drive the price more and more down to these levels.  The main reason for it not being at these levels is because the majority of small time investors (people with their retirement accounts, IRAs, etc) are thinking that they have already lost so much and might as well not pull out now because the market will have to go up.  They also think well if I lost this much already what is another 30 percent going to hurt.  As we get lower and lower more and more long term investors will get out.  

The final key factors that will bring the markets down to these levels are an increase in interest rates.  More and more investors will find that their money will be safer and better off in other securities like T-Bills and sell their securities.  Why might we have to increase interest rates in the next 12 months?  We need China to invest in our economy.  With low interest rates it is making China look elsewhere to put their moneys.  Also in the near future we will start to see high inflation if we don’t do anything due to the extreme amounts of money the government is printing.  The only thing that we can do is increase interest rates to keep inflation from expanding a lot.  

I think there will be a relatively small interest rate hike and the market will respond by having a big sell off to the orange support level within the next 12 months.  But as of right now we will tread water and move relatively sideways to downward.  But be ready for an extreme move upward when we have hit bottom!

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