Since the publication of the previous edition of the Sterling Weekly the overall market as measured by the Dow Jones Industrial Average rose 184.56 points or approximately 2.0% to finish last week at 9,505.96 While the trend of the overall market has been to the upside, the market appears to be a little skittish at times. By its very nature, it wants to believe that the economy is doing well; but it seams very worried that the economy could turn south at the drop of a hat. One of the very big problems the market has is that the vast majority of the market participants don't remember what it was like the last time we had an economy like this one. This is because we have to look all the way back to the 1970's and early 80's to find a similar economic situation, and most of the market participants were not old enough to be paying attention to the market back then, so they don't know or remember what it was like, and they just aren't sure what to do now.
With respects to the current market, we have undoubtedly been through one of the greatest market pullbacks in history. The question now is what do we make of the current market rally. Well the tradition rule of thumb is that a market will retrace 1/2 of its previous move. I was taught that this was known as a Fibonacci Retracement, and a more accurate description was that the market or an individual stock would retrace between 1/3 and 2/3rds or its previous move, before resuming its previous course. So let's look at some numbers. The overall market as measured by the Dow Jones Industrial Average set an all time closing high of 14,164.53 in October of 2007, and reached a closing low of 6,547.05 this spring. This represents a downward movement of 7,617.48 points. A 1/3rd retracement of that downward move would be a rally to 9,086.21 on the Dow; a 2/3rds retracement would be a rally to 11,625.37 on the Dow Jones Industrial Average. Once the Dow is in that range between a 1/3rd and 2/3rds retracement it could easily turn and move back lower. In case you are wondering, a 50% retracement, which is what the media focuses on, would put the Dow Jones Industrial Average at 10,355.79 While I am not trying to predict where the Dow will go from here, I do think it is important that we do not forget these retracement rules and where they put the Dow.
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