|Party Like It’s (Almost) 1999
|February 20, 2007
Ah, 1998…the year when Apple unveiled the iMac, when the Lewinsky scandal was in full swing, when Google was just a new company and not yet a verb.
It’s almost time to take profits in Qualcomm (QCOM). As those of you who were with us last month will recall, on January 16 I recommended that you buy Qualcomm on the back test of $38 for a target of $45 because I saw it was in a Bottom Triangle/Classic Wedge reversal pattern.
Well it’s now in the $42 range…but don’t pull the trigger just yet! We’re very close but don’t sell until it hits $45 — and you’ll enjoy a profit of 18%!
Why am I suddenly sentimental for 1998? Because something just happened in the markets that hasn’t happened since then. And it could be big. Again.
Last Wednesday, marked the first time since March 17, 1998, that the Dow industrials, transportation and utilities averages have closed at simultaneous highs. And in fact this neat little trifecta has only occurred 20 times since 1929.
So how should you interpret this recent headline news story? Well I want you to think of it in terms of the DOW theory.
Um, Dow Theory?
The Dow Theory has been around for almost a hundred years, yet even in today’s volatile and technology-driven markets, the basic components of it still remain valid. Developed by Charles Dow, the Dow Theory addresses not only technical analysis and price action, but also market philosophy. While naysayers may lead you to believe that the markets will be “different this time”, the Dow Theory attests that the stock market behaves the same today as it did almost 100 years ago.
And By That You Mean…
More than half a century ago, Ralph Nelson Elliott identified the wave structures we now know as Elliott waves. Elliott believed that price trends in the market occurred in two basic types of waves—motive and corrective. Motive waves may also be called impulsive waves. They are so named because they move, or impel, prices in the direction of the underlying trend. A corrective wave, on the other hand, moves prices back in the opposite direction, against the underlying trend. Motive or impulsive waves are made up of five waves labeled 1, 2, 3, 4, and 5, and corrective waves are made up of three waves labeled A, B, and C.
Now here’s how you can use waves in trading. If you can correctly label the waves in a stock chart and identify what segment of a motive or corrective wave the stock is currently in, you can make better decisions about which way to play the stock and what to expect in the coming prices moves.
Of course, without guidelines, accurately identifying the waves would be impossible, so Elliott developed a series of rules for us to follow.
Motive or impulsive waves always subdivide into five waves labeled 1, 2, 3, 4, and 5. Waves 1, 3, and 5 of impulsive waves are also impulsive (they go in the direction of the impulsive wave), and wave 3 can never be the shortest of the three. Waves 2 and 4 are corrective (they go against the impulsive wave), and wave 2 can never retrace more than 100% of the prices in wave 1. Finally, wave 4 can never overlap the prices in wave 1.
Corrective waves, on the other hand, always subdivide into three waves labeled A, B, and C. Waves A and C are impulsive (they go in the underlying direction of the corrective wave), but wave B is corrective (it goes against the corrective wave). You can find corrective waves by first properly identifying the impulsive waves. If something doesn’t match up with Elliott’s rules, then you know you’ve made a mistake.
Now, I know this can be confusing, so I’ve put together a few examples on the Trending123 website to illustrate how Elliott waves work. Click here to see how you can use them in your own trading.
Look, the bottom line here is that the Dow Theory is simply not subjective. There is no wiggle room when it comes to the Dow Theory. It either is or it isn’t. And right now, the DOW is bullish.
So what does that mean for the market and your stocks?
We’ve got to go back in time a moment to answer that question. So journey back with me to 1998 and you’ll see that the Dow looks very similar to how it is looking here in 2007.
Well in 1998, you may recall that right after the Dow industrials, transportation and utilities averages closed at simultaneous highs, the market slid 2,000 or so points. Not a pretty scene for a few months, that’s for sure. Luckily it didn’t last too long, because two or three months later came one of the biggest NASDAQ bubbles ever. And by 2000 we were really sitting pretty, riding tidal wave after tidal wave of optimistic goodness. (Cue Prince’s “1999” song here.)
So, my friends the moral of this story is “don’t fear the pullback, for the rally is on the horizon.”
Though I’d love to use my magic future prediction powers to tell you that history is about to repeat itself, and 2007 is going to be 1998 Part Deux, I just can’t. What I CAN tell you for now is to keep this nugget of information in your back pocket. If you want to learn more about my thoughts on the Dow Theory and what I think the market is showing us right now, please go here.
And I can also tell you that I am still very positive on the 3 stocks I alerted you to buy last week. If you are brand-new to Trade Talk Weekly, or you just didn’t put those stocks on your priority list, do so now.
Still itchin’ for more info? You can check out the rest of my site here: trending123.com HINT: The only way you get an all access pass is to subscribe, but luckily you start off with 14 days at NO COST. Pretty sweet deal, eh? Check it out here.
P.S. In an ever-changing market, it’s not easy to keep up or know what to do next. That’s why my priority is you. With timely analysis, multiple daily updates, stock charts, education if you need it and most of all, profits, you will always be “in the loop” on everything that matters. Whether you’re a seasoned pro, a rank beginner or somewhere in-between, you’ll find plenty to like at Trending123.
P.P.S. Stay tuned for my next edition of Trade Talk Weekly…coming soon to an email box near you!