For Clues on the Future, Look to '73

This column was originally published on RealMoney on Jan. 4 at 7:16 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

After a very strong up year, the volume quieted on year-end, as the Dow hovered just below all-time highs. With the first trading day of the new year, prices took off and volume expanded. It was at levels never seen before, and the bullishness was endemic. The Dow went to new highs. It had been seven years, almost exactly, since the Dow had made a long-lasting top.

Recently, the markets pushed slightly above that earlier seven-year high. They had been in a wide sideways consolidation ever since that secular bull market had ended seven years earlier. The propitious beginning to the new year with a move to new highs was widely heralded as the start of a new bull market.

2007? No! 1973.

But the pattern is so hauntingly similar that one has to wonder. We even have the December pullback prior to the final advance. The market high was made on Jan. 11, 1973. (Mark Twain said that history does not repeat itself but it rhymes.)

Take a look at the chart below, and you will see what happened. It was a major market top that would not be exceeded for another nine years. This is not a prediction, since the uptrend is still intact, at least as far as the Dow Industrials are concerned, but it certainly should serve as a sobering warning that bull moves such as the one we have been in since 2002, and the recent upsurge since July, eventually come to an end. Perhaps the dates are coincidental.

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To view a larger version of these charts (in some browsers), after clicking on the "larger image" link below the chart, mouse over the lower-right area of the chart until the icon with four arrows appears. Then click on that icon.

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Repeat Peformance? The price action from 1973 is strikingly similar to now

Click here for larger image.

Source: Metastock

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Centex: Buy

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Source: Metastock

A stock that looks particularly attractive right now is Centex (CTX Quote). In a market in which many groups look overbought, the residential builders emerge as a group of stocks that appear poised to move higher. A month ago, Centex went above resistance with better volume, giving us a sign of strength. Since then it has pulled back on lighter volume and started to strengthen again. That makes it look as though it could be bought around current levels. The wide base justifies a lasting advance. (To do my Equivolume charting, as in the charts that appear in this column, I use a charting program called MetaStock. To learn more about this method, read my series of columns, Trading With Equivolume .)

Hovnanian: Buy

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Source: Metastock

Hovnanian (HOV Quote) is another residential builder stock that looks particularly strong. Notice the series of up moves on better volume interspersed with lighter-volume pullbacks. I have indicated the power box in late November, in which it left a small gap behind as it went decisively through resistance. The pullback since then has taken the price right back to the breakout level. The wide base is encouraging. The stock looks like a buy around current levels.

Apple Computer: Sell and Short

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Source: Metastock

Apple Computer (AAPL Quote) turned upward and gave us a signal of strength back in April. After a rise, it pulled back again before going higher, so buyers on the April suggestion may be long gone. But now, after a very strong advance, it has turned down enough to look as though it is headed lower. The two moving averages have crossed to the minus side, and volume has come in decisively to the downside. If you are still long, I would suggest taking the profits while we have this little up jog. It also looks like a good stock for a short position.

FedEx: Short

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Source: Metastock

In FedEx (FDX Quote), we again seem to have all the necessary components for a further down move, as we did back in April when it was also suggested as a short. That signal led to a profitable down cycle, and this one looks as though it could also. It has rallied on light volume in the last session, after breaking support with a convincing power box to the downside. With a big Equivolume box following a small one across the gap, it looks like a breakaway gap. I see the stock as a short sale around current levels.