What to Do If DJI Suffers a Multi-Year, DEEP, Recession!

2月24日

In this chart, we capture ALL of Dow Jones' trade history (monthly candles), fit a traditional pitchfork to it, add in the most recent/ relevant "upper-bound" (resistance line that is parallel to the pitchfork, and has not been breached for several decades going, marking a potential technical level that could lead to a future, major pivot in price) - the thick black line on the chart - and then do some quick RSI analysis on.

We can see that the area under the mid-line of the pitchfork has historically got a lot of price action, spending most of the period between early 1969 and late 1991 below it. However, other than 1991, it had only seen "recent" action very briefly (for about two months), marking the bottom of the major correction/ recession that the market experienced from late 2007 to early 2009.

One can't help but wonder whether the market is due (perhaps "overdue") for another major correction into that area of the pitchfork. It's arguable that we have macro-conditions for a major correction (depression?), but arguments for and against now being the time are beyond the scope of what I aim to provide, for now.

My only goal here is to highlight for you that, on a purely technical analysis level, there are SEVERAL signs that now may be a time that we see price make a major pivot into a DEEP correction, taking it all the way down to the area under the mid-line of the pitchfork and tagging the "oversold" line on the monthly RSI (under a value of 30), likely taking many, many years to complete.

The signs that I speak of are:

1.) Price being relatively close to the top boundary of the pitchfork.
2.) Price is currently about 10% below the "upper bound" (resistance line that runs parallel to the pitchfork), that resulted in a MASSIVE correction the last time that it was tagged (January of 2000).
3.) We seem to be in the process of printing a BEARISH DIVERGENCE between price and RSI (higher highs in price, with lower highs in RSI).

Speaking on #3, we can go back in price history and see other moments in which this bearish divergence with RSI occurred, helping to spot a major correction that started in early '66 and another in early 2000.

Sticking to the RSI, I've highlighted all the moments that it tagged, or sunk below, the "oversold" level (an RSI value of 30 or lower), both circling when these moments occurred and marking the dates when it dipped below or broke above that level w/ vertical dotted lines.

It should be very clear by observing those moments that tags of the RSI oversold line acts as a decently accurate indicator of bottoms to major corrections; thus, I'm of the opinion that its the main technical indicator to pay attention to if/when we finally see the massive type of drop in price that is required to move price back down below the mid-line of the pitchfork (which almost certainly WILL happen, eventually, given enough time).

I noted on the chart that the "buy zone" is the "upper quadrant" of the area of the pitchfork below its mid-line. That's not to say that it's impossible for the market to drop deep enough to tag the bottom line of the pitchfork, or perhaps even break through it (let's hope that this isn't ever the case), but rather what seems, in my estimation, to be the highest probability level for a new major pivot into an upward trajectory in prices (based on analysis of the historical data presented on this chart).

I don't expect that I'd be "buying blindly" if price were to ever be trading again in that area of the pitchfork. Rather, as I alluded to earlier, I'd be keeping a close eye on the monthly RSI and planning to buy in big if it touches, or breaches, the 30 (oversold) level. More specifically, I'd probably start "dollar cost average" buying, at around 20% deployment of reserve capital per month (over a 5 month span of time), only after the very first monthly print of a 30 RSI value, or lower.

I've also included important simple moving averages that we should pay attention to, and may help us determine the "health of the market" and/or where price is more likely to be heading in the mid to long term outlook. The moving averages that I used are (in order from the one that's currently the highest price to the one that's currently the lowest):

1.) the "yearly" (12 month) SMA
2.) the "presidential cycle" (48 month) SMA
3.) the "decade" (120 month) SMA

Relatively speaking, price has historically spent very little time below the decade SMA, so it can be a valuable indicator to keep an eye on, should we ever see price dip sub-pitchfork-midline. Simply buying when price trades below that SMA has historically been a great strategy for catching high yield on investment dollars, w/ very little risk (the "Great Depression" of '29 through '32 being the one major exception).

It's my hope that you get some value out of this extremely long-term outlook on DJI's market history. I would never wish for the market to tank, but I do believe that another major price dip is inevitable, so it can't hurt to be armed with a little knowledge about what can be expected if another Great Depression, or major recession, moment were to fall on our collective plates.

Perhaps, armed with this insight into how price responds to the monthly RSI, we'll come out better/ richer on the other end...

Time will tell..