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A Midyear Technical Checkup for Stocks

This post appeared earlier this week on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.

As we enter the second half of 2011, let us take a look at where we are on a long-term technical basis and try to ascertain what may lie down the road. To do so, we need to work downward from the very long-term studies.

Much of this has been published before, but it bears repetition. Way back in 1984, I wrote about the long-term cycles in a piece called "The Super Bull Scenario." Those thoughts and projections still seem to be holding true today. On the first chart, below, we are seeing the Dow Industrials going back over 40 years

Dow Industrials, 1970-present
Source: Metastock

We see here that we are in a big sideways move that began in 2000. It is very similar to the consolidation between 1966 and 1984. That is, in fact, similar to prior cycles going back a century at least, in which we have consolidations lasting about 16 years and separated by advancing periods -- major bull markets -- also lasting about 16 years. The implication, since this consolidation is now 11 years old, is that it is going to go on longer, so we should not be looking for a move above the old highs. The lows are also likely to hold, but we are close to the highs and far from the lows, so we are likely to see a downward move in the months to come.

Look now at the two periods enclosed in blue ellipses. The similarity is striking. In both cases, about halfway through the consolidation, a lower low was made, leading to a strong up move with three up legs. That led to a sideways topping action and then a big new decline. If history were to repeat, or at least rhyme, we would be looking at a drop ahead.

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