The Dow Industrials and the S&P 500 and 100 have exhibited quite satisfying price advances over the past four trading days, driven in part by fine reports from Google, Intel, Johnson & Johnson and others; together with P&L reports from major banks which were “less bad” than had been predicted. So, all is well; profits are on a general upswing; the banking crisis is over and done with; and Recovery is here.

It doesn’t matter that new home construction is in deep doldrums; that sales of existing homes are perilously close to the vanishing point; that mortgage credit and other loans are very difficult to extract from extremely nervous lenders. It also doesn’t matter that the derivatives time bomb continues to lurk in the background, for the counterparties to those contracts will no doubt be ready, waiting, and anxious to fulfill their commitments at the proper time. High food prices at the supermarket and punishing prices at the gas pump are insignificant in the big picture.

Ah yes, how the mania persists. This is a reflection of the euphoria which attended the markets in the runup to the climax in 2000 and again in October 2007, which probably marked a high point which we will not see again for many a year.

History doesn’t necessarily repeat; but it does return while wearing a different hat. There is no “new paradigm,” and the fundamental laws of nature and of economics haven’t been repealed. We can learn from the past, but we have to look first.

There is a particular pair of Indicators which, over time, has proven to me to be quite prescient and reliable in predicting a price decline in the Indexes. The condition arises, of course, when prices are at a high, and tends to be most pronounced after a persistent rise or at a spike, but can also occur following only a relatively short-term rise if the rise is significantly strong. Specifically, when these two Indicators approach each other sharply in a “kiss,” the proximity constitutes a warning of a probable price reversal soon.

We see that happening now in the Dow Industrials and in the S&P 500 and 100.
Here is a chart of the Dow. The S&P 500, 100, and NASDAQ charts show very nearly the same phenomenon.

Accordingly, it would seem that prices in these Indexes are close to topping and rolling over. We shall soon see whether the “kiss” between these two Indicators works this time.

William Kurtz April 19, 2008 http://candlewave.com/candlewave.htm