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Article / 20 December 2013 at 11:01 GMT

Beware 18,738 — it may be the Dow Jones pre-crash tipping point

Technical Analyst / Saxo Bank
Denmark

By Kim Cramer-Larsson

Back in January 2011, I wrote a story for a UK magazine predicting two things: Firstly, that the market would continue to rebound from its lows in 2009 and secondly that we could see Dow Jones Industrial Average above 18,000 within 3-5 years. At that time Dow Jones was at 12,200, now it is at around 16,000. In other words I predicted Dow to reach 18,738 in 2014-16 and I still believe that to be the case.  

But why 18,738?  Is it just a random number? No it is not. It is based on what Dow Jones has done the past 100 years starting with the mother of all stock market crashes in 1929. Let me explain.


oct
Wall Street has good reason to beware October and the Dow Jones Index could  hit its pre-crash tipping point, about then. Photo: Shutterstock.com


Charting history

I have looked back over the past 100 years of market movements to try find possible targets and/or resistance and support levels. The first chart below is a log chart of the Dow Jones Industrial Index since 1900 and shows what the Index has done when reaching major Fibonacci support and resistance levels from the crash in 1929 up to 2010. These are highlighted Index values on the left.

All these levels are in fact Fibonacci number levels. I took the high in 1929 at 381.17 and the low when the Dow made its all-time low in 1932 at 41.22 and then made a projection. Fibonacci levels shown are: 0.5, 0.618, 0.764, 1, 1.382, 2, 3, 5, 8, 13, 21, and 34. If those Fibonacci numbers have been important in the past, Fibonacci numbers will very likely also be important in the future.

Dow 1929-2013

Source : Bloomberg LP

Bear necessities

From the chart, we can see that almost every time Dow Jones hit a major Fibonacci level a correction — or indeed a crash — occurred. Again all levels are resistances and projections based on the 1929-32 bear market.

Several corrections in the 1960s occurred after reaching the 2.764 and 3.0 Fibonacci levels. The big market crash in 1987 occurred after Dow hit Fibonacci 8 (within less than 1 percent), and dropped down to Fibonacci 5. The bear market in 2001-03 occurred after it hit Fibonacci 34 sending the market back down to Fibonacci 21 (all within 1 percent).

The only major correction that did not hit a round Fibonacci number before we saw a major correction was the 2007-08 correction/crash on the back of a bursting housing bubble. The peak in 2007 did, however, hit the 1.5 projection of the 2000-03 bear market before it was sent down to the Fibonacci 21 level once again, overshooting it a bit. 

The charts below illustrate how close the Dow was trading to and was rejected or supported at various Fibonacci levels — levels moreover that have their base in the 1929-32 peak and trough.

kim1

kim2

kim3

Source (all charts): Bloomberg

As predicted back in 2011, Dow Jones is now on its way towards Fibonacci number 55, currently trading at around 123.6 and 127.2, the Fibonacci projection of the 2007-09 crash/bear market. The 161.8 (also called the golden ratio) Fibonacci projection based on the 2007-09 bear market is at 18,974, approximately 1 percent above the Fibonacci 55 based on the 1929-32 crash/bear market which is at 18,738!

That is approximately 18 percent from current levels. That level could very well be reached in 2014 and I believe it could happen sometime around September/October. Historically, most crashes and major corrections commence in October. You've been warned!

Life's certainties

But couldn't the market just go through the next major Fibonacci (55) and go on to 89 before a correction? Well it could of course. There are no certainties in life (other than death and taxes) and it is not a given we will see a crash or major correction after reaching Fibonacci 55. It is not a rule of nature that a crash should occur when reaching a Fibonacci number. The market has "ignored" such a number before and kept rising. But the next major Fibonacci number is at around 30,000 so I don't think it is very likely it will do that before we see a major correction. 

Dow Jones 1993-2017 (projection 2014-17)

DJI Monthly

 Source : Saxo Bank

If we get a crash or a major correction, the rule of thumb in bubble theory is that the market drops back down to its pre-peak and if there are two pre-peaks, it should drop at the very least to the highest one. Whether we will see one or two pre-peaks is too early to say. But if the market crashes or corrects to the pre-peak we have seen so far in 2011, it would be a drop down to around 12,000 ie. approximately 34 percent, if the market peaks out just below 19,000.

The Dow Jones chart from the mid 1990s and a few years into the future. We can see that the Index is testing the upper trend line from the two peaks in 2000 and 2007, so maybe we are already facing a correction early 2014? However, I have drawn a possible scenario for the next couple of years on the above chart. But lets see — maybe it really is different this time....

(mo)

6y
alpha yankee alpha yankee
The delay in a major correction would justify your terms and equations for October, but when we make the same analysis for DAX it denotes that the major correction would come btn January and April making DAX down to 8174 level (%16). But if the downtrend would strike on October then it would not be a major correction but rather be tagged as a strict crash, and if so it would dig deeper as you have stated in your assesment nearly %34 percent. Finally while everything is going well in world economy except China the %16 major correction seems to be more possible instead of a %34 crash in October. However, each major correction and crash requires to be justified by a solid chain of reasoning. And the unknown parameter is who would lay an egg for such a trend and when ? FED can only cause a major correction in the 1st Q 2014 by %16, then for a crash by %34 in October the actor can only be Chinese banking system...
6y
Miguel Levy Aires Miguel Levy Aires
@alphayankee the correction you talk in DAX can perfectly be the second pre peak that Kim talks about in DJ. I can imagine the DAX ending the minor correction near the 8.500 level instead of 8174 level that you, with a really powerful argument, point out,
5y
Piotr_Walkowsk1 Piotr_Walkowsk1
It is happening,
I have 3 important levels from Fibonacci confluence zones at:
17'500
18'200
18'600
I think DJI is forming Rising Wedge, but without Gann it can only be my guess.
Last sharp move down from 17'150 must be wave 4' of 5
and last low of 16'333 is the starting point of Rising Wedge.
Also look at the chart below RSI Quarterly

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