The Dow Illusion – II

We wrote about the Dow psychology in Oct 2008.
“Correlations are an illusion that we live in, as you can actually draw a cycle of increasing and decreasing correlations between DOW and Sensex. And what use is correlation anyway. Correlation as a trading indicator works miserably with not much back testing validations. Dow is our psychological alibi that we use to explain market vagaries. There is no other way you can explain why if the problem is in America, why did China, Russia, India and the world fall more than the DOW. Of course there will be some explanation for this too.”
There is another illusion we are living today, the illusion of how markets behave when there is a financial crisis. In any crisis inefficiency goes out and efficient systems rebuild the economic structure. Now this means that any thing unsustainable will move OUT and sustainable structures will survive and thrive. Now what is DOW, An index of efficiency or inefficiency? DOW index will always try to mirror efficiency, anything that is inefficient will be kicked out of DOW and just strong companies will remain back as constituents. This means looking at DOW to estimate the direction of the crisis over a longer term might be a bad idea, as over the long term the DOW has an opportunity to keep strengthening itself with new efficient components. This is why looking at what DOW is doing over the long term might challenge another of our short term psychology illusions. Did you know that DOW is 16% from an all time high, which it has not distinctly broken in 12 years. The basic rule of market structure suggests that the more a resistance is tested, the more likely it’s to break. Any 16% upside gives DOW a chance to test the 12 year resistance. How large is a 16% move? Ask this to an emerging or frontier market participant and he(she) might be surprised “that’s all DOW needs to go to historical high?”. But that’s not the real surprise. The real surprise would be the news that would appear when DOW makes a new historical high of 12 years. The current 12,000 resistance high offers a true trend line resistance. A break here would leave DOW in a free rise to historical highs. Above this the monthly and weekly oversold momentums are also testing key trendlines. A break there too will confirm that the cycle lows are already in place and the BULL SURPRISE might happen.
This special report looks at the DOW connection with the Indian Sensex and what it means for Sensex if DOW is headed to a new high. The report covers Indian sector indices, gold and oil.
To read the complete report download it from Orpheus E store.
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Coverage India: CNX500 traded stocks and Indian Indices.