Changes In The Dow Jones Industrial Average - 1
Hedgehog University Stock Market Analysis
Week Ending Friday, February 22nd, 2008
The Hedgehog University (HHU) is re-opening at the Hedgehog. I will
be posting the HHU weekly market commentray in the newsletter and
building out a Hedgehog University section on the web site.
Changes In The Dow Jones Industrial Average - 1
As of February 19th, 2008, two stocks will be added to the DJIA and
two stocks will be deleted. Some of the history of the DOW is that
the 30 stocks represent resilient corporations with great management.
Over the years, we have watched IBM flounder, then recover. We
watched AT&T change and get dropped. We have seen new kids on the
block added such as MacDonald's, Disney and Walmart. There is a
saying that as GM goes, so goes America. We've been watching GM
flounder and wondering if at some point it would be dropped the DOW.
GM is scrambling like crazy these days trying to not become a Ford or
a Chrysler and to stave off the challenge by Toyota. Will GM be an
IBM and rise to the top again? Time will tell. And if GM does not,
then will that indicate that the American economy is really in serious
trouble? If GM goes like Ford,will the economy fall to that level as
the Chinese and Indian economies strengthen?
We thought we would give you our take on the present changes from a
technical perspective. Let's start by reading some of the explanation
from Market Watch of the changes.‘In a Feb. 12 commentary, Morningstar
wrote that the Dow was trading at a "very hefty" 17% discount to the
firm's fair-value estimate of 14,000, which is in turn based on
estimates on the index's component 30 stocks. The Dow closed Friday at
12,348.21. Morningstar's conviction rests on fundamental research on
the underlying companies' long-term prospects and doesn't consider
broad macroeconomic factors such as interest rates or the U.S.
dollar's movement. However, other analysts also expect the large-cap,
blue-chip companies that dominate the Dow to lead the market. "The Dow
hasn't looked this cheap to us since September 2002 when the index
stood at 7,592," wrote Morningstar analyst Jeffrey Ptak, noting that
three years later the benchmark stood at 10,569. 'Explanation: The
DOW is in a corrective phase in terms of Elliott Waves. The last time
the DOW was in this sort of state, the correction took 2 years of ABC
correction and this was followed by an impulse wave series which
terminated in October of 2007. We need to end this current corrective
series by altering the content of the DOW to speed up the return to a
bullish stance. (The FED has done most of what it could by lowering
the interest rates, now the people who run Wall Street have to do what
they can to support what the FED has done.)
Let's analyze this thing from October 29, 2004 until October 12, 2007.
This is a weekly chart. This was a fairly consistent and sustained
upward movement. Checking just a few charts, WMT did not account for
much of that movement. MO did. HON did but it had been hammered in
the last market correction. We’ll look at those charts in due course.
One of the reasons to pick this time frame to analyze is that W. D.
Gann used a year and a compass to construct his Gann Wheel on the
square of nine. Gann used to watch certain dates for market
reactions. For instance, is it a coincidence that the market ran out
of gas within two weeks of a two year important market turning point?
Gann would have been watching every end of October once the October
29, 2004 pivot had been established.
So, do you see an A B C in the downward correction (retracement)? We
have put up GET’s Fibonnaci drawing tool. Have we retraced 50% of
that upmove? It took from October 20, 2006 until October 12, 2007 to
climb from the 12,000 area to the 14,000 area and it took from October
12, 2007 to January 25, 2008 to retrace that climb. One year to go up
and, get this one third of a year to retrace. The Gann Wheel operates
on quarters and thirds to mark dates to watch. The one third of a
year is February 4, 2008. We had been marking that date in late
December when we did our short trades in the first part of January.
Remember, Gann didn’t have the technology with computers that we have
today and for him to have figured this stuff out by hand (there
weren’t even calculators available to him) and to use the 360 degree
circle as his proxy for a year the guy was a genius!
Before we leave this chart, note that August 17, 2007 was an important
date. 135 degrees on the Gann Wheel was December 30, 2006. We exited
all our longs at that time and began looking at the short side of the
market. Note also that the level of drop on August 17 was the 38%
retracement of what turned out to be the high of that sustained
upmove. That would not have been known by us on August 17, but it
does add credence to the argument that there is a geometric structure
to these markets. Another thing that pops out is that if the market
does crater from here, we have a head and shoulders top. We have to
look at these charts from a lot of different geometrical points of
view.
This will be a four or five part explanation so stay tuned for more
DISCLAIMER: The Hedgehog Website and the writers of this series of
lectures have created this service to educate, inform and elucidate.
We will use accepted methods of fundamental and technical analysis in
our explanations. Investing in securities carries with it a certain
degree of risk. Neither the Hedgehog Website, nor any of it's
principals or employees can be held accountable for any losses or
gains made by any person following our methodology. We attempt to
provide the information in good spirit to be used in whatever manner
the reader sees fit to do so. We use charts provided by
Equis'Metastock (tm) software, e-Signal's Advanced GET (tm) and
BigCharts (tm)