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Looking to the Past for Guidance

On Monday, the markets are expected to be open, and many of us will turn our eyes back to our daily lives. The agony, sadness and anger will remain, of course, yet we will be forced to attend to the task at hand.

The Market
History Shows Panic Selling or Buying Is Not a Good Strategy
Facing Hard Task, Fund Managers Ready Trading Plans
The Argument Against Gloom
Cramer: Euro Markets Don't Tell the Whole Story
Sector Watch
Investors Will Be Seeking Safety, but Not All Will Desert Biotech
Software Firms Likely Will Forget the Third Quarter, Look to Fourth
Consumer Uncertainty Weighs on Wireless Sector After a Week of Warnings
Defense Stocks Aren't the Sure Bets You Might Expect

So, while I recognize the need to deal with our emotions, I also recognize the need to provide whatever counsel I can in the area of my expertise.

Therefore, here's a quick look at what we might expect in the markets, using history as a guide. (Don't miss my colleague K.C. Swanson's take on looking forward with the benefit of hindsight. )

Below you will see four charts displaying market action during two historic events. There were many events to choose from, but the bombing of Pearl Harbor and the assassination of President John F. Kennedy seemed the most comparable in terms of collective shock to our system. Of course the events of Sept. 11 overshadow just about all prior catastrophes in the U.S., so extrapolation is shaky at best. But we have to make do with what we've learned in the past.

What we've learned in the past are two important points:

  1. The immediate reaction is usually a big down day.

  2. But, that move notwithstanding, the market tends to continue the direction of its prior trend.

The second point is important. After the bombing of Pearl Harbor, the market did collapse, only to rebound a bit. But then the previous trend, which was down anyway, continued until it reached a logical bottom (in this case near the 1938 low).

In the case of the Kennedy assassination, however, while the market did move down that day, it almost immediately resumed its prior trend, which in this case was up. In fact, the shorter trend of the market, which had been heading down for the past few weeks, was halted abruptly with the big down day on Nov. 22, 1963, and continued up for the next few years.

That leaves us with the present direction of the Dow. On a weekly chart, you can see the move has been primarily sideways (albeit with some volatility) for the past few years. Frankly, I would expect that to continue.

On a daily basis, however, we have been heading down for the past few months, similar to what had been happening in the fall of 1963. Therefore, if I can make a leap of faith and use 1963 as a template, I would fully expect a gap down test of the March lows, and then a resumption back to a sideways movement. To do that, of course, would actually involve a reversal of the downtrend and a bullish period lasting weeks, or perhaps months.

OK, all well and good, but does this scenario have any validity? I honestly don't know. Like I said in an earlier column, I am in wait-and-see mode. Nevertheless it is good to at least have a hypothesis of what might happen and then be able to change it, instead of having no vision at all.

So, until I see or know differently, I will work on the theory that we start off abruptly down and then resume a choppy sideways period. As always, of course, I will present any new thoughts each and every day on this site. Let's just keep our fingers crossed.
Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes six technical analysis columns for each week, including TSC Technical Forum each weekday, and Technician's Take once each weekend. While he cannot provide investment advice or recommendations, he invites you to send your feedback to Gary B. Smith .

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