Citi: "The Market Will Form A 'Terminal' High"

Stepping back from the trees to survey the forest (from the Moon perhaps) often provides some clarifying picture-paints-a-thousand-words view of the world. This is exactly what Citi's Rick Lorusso has done and while he called for a correction back in March which was followed by a 10.9% drop in the Dow, he was disappointed and is looking for a far greater adjustment - no matter how many times he hears about negative sentiment and QE and soft-landings. Starting from a truly long-term yearly chart of the Dow Jones Industrial Average, Lorusso conjures wave patterns, Fibonnacci, and cycles as he rotates down to monthly and daily charts to conclude that his charts "suggest the potential for a very significant high this year," in the July/August period, summarizing that Citi is "anticipating that the market will form a terminal high." - even more so on a rally from here as he warns "beware of new highs" so bulls be careful what you wish for.


Citi Prime Finance: Dow Jones: Beware of New Highs

We heard recently on the radio that investor desire for risk is now lower than anytime since the first quarter of 2009 when the equity market put into place a multi-year low. Sentiment is conspicuously negative and continues to be impacted by the continuous litany of “news” from Europe and more recently disappointing U.S. employment data. We are technical however so against this apparent negative back drop we thought it was timely to take a look at the market. In our last visit (S&P 500: Ripe for a Correction, March 8, 2012) we were anticipating a correction. We were early but April-May did deliver a 10.9% pullback which for the equity market was a fairly standard move. We were frankly expecting a far greater adjustment but that was not to be.

1. Dow Jones Industrial Average - Yearly Chart

Our attention today starts with a truly long term chart, an annual of the Dow Jones Industrial Average starting from early 1900’s. The magnitude of the price range necessitates a log scale. The first and most conspicuous feature we see immediately is a 13–year broadening top or as we have come to refer to it, a 5-point reversal pattern. Our pattern is more qualified however than a classic broadening top and consists at minimum of 5 significant turns. The highs, points 5, 3 and 1 are at progressively higher levels and are separated by two reactions, points 2 and 4 with point 4 lower than point 2. What is missing on the chart is a new all-time high on the Dow above 14198.1, the former point 3 high. Is it possible that could occur against the back drop we have described ? Based on a history of the stock market, certainly. If that in fact produces a dramatic shift in sentiment to the bull side, the market will then become exceedingly vulnerable to completing the foregoing 13-year pattern.

But there are some other notable factors which appear on this yearly chart which are distinctly time-oriented. In 2012, the Dow has the potential of completing the largest Fibonacci golden section we have ever seen for any market. The first point of this section is the 1932 low, and the second is the end of the a 16-17 year sideways market which ended at the 1982 low. Additionally, 2012 has the potential to complete two 40-year equal swing measurements in time which we have illustrated across the bottom of the chart.

2. Dow Jones Industrial Average - Monthly Chart

On our second chart (above), also a monthly, we are illustrating a simple repetitive 5-year period from October to October. It is more than interesting that the month of October, every 5 years has proven significant, delivering 4 very important lows and the all-time high. Another iteration is due this year.

3. Dow Jones Industrial Average - Daily Chart

 Charts 3, 4, 5 and 6 detail for the Dow a loosely defined pattern of price behavior which for the lack of a better description we shall consider as a transition. Predominantly, prices are choppy and often range bound and ultimately will form a relevant high or low. The point at which the pattern ends begins a fairly directional price move which we have indicated with a heavy blue line. What is interesting is the fact that the 12 transition patterns require roughly the same amount of time.

4. Dow Jones Industrial Average - Daily Chart


5. Dow Jones Industrial Average - Daily Chart


6. Dow Jones Industrial Average - Daily Chart

They range from 81 to 92 trading sessions and average 86.5 days. The median value is 87 days. Our last chart (chart 7 below) today is the current daily Dow chart. Here we annotated a couple of transition possibilities the first of which would terminate near July 20. There is another possibility around August 6. Other technical tools should be available to help confirm or deny a possible termination point in either of these two time frames.

7. Dow Jones Industrial Average - Daily Chart

In conclusion, our long term charts suggest the potential for a very significant high this year. Our immediate near term focus is on the late July/early August period but there are also reasons to be keying on October.