Box 88 San Geronimo CA 04963-0088 www.edwards-magee.com bassetti@edwards-magee.com
February 2006 Can the Future be Predicted? Of course it can if you are sufficiently vague.

We live in interesting times. You will remember the Chinese curse: “May you live in interesting times.” Especially interesting in Market Time. Where, mirabile dictu, the Dow is knocking at the door of new historic highs. Among technicians there are, like your faithful correspondents, grumpy old bears, and sunny optimists like Professor Hank Pruden, who avers that the Dow is going to 14400. Actually, like everyone else we don’t have any idea, but that doesn’t stop us from rashly venturing an opinion and cobbling up an analysis. If our analysis and opinion is wrong we will, just like the Bush Administration, stand up and accept responsibility. Like hell (same as them) (sic) we will. Everyone knows we don’t stand behind our forecasts. With the reader fully informed of the ground rules we fearlessly bungee off into space and tell you what chart analysis has to say about where the Dow is going. Most probably to hell in a hand basket but… Before we can figure out where we are going we need to figure out where we are, thus:

Dow, 1 year. Sideways market anyone(?), ending (February 17 2006) at the top of a broadening pattern.

From a classical chart analysis nothing can be said of this chart but that it is a ragged trading range. So, what is going on here? Several things can be happening in trading ranges. Distribution. Accumulation. Fencing between buyers and sellers. Broad uncertainty. The erosion of resistance, or of support. When no clear pattern is apparent the focus may be lengthened, and other bones of the sacred chicken consulted. So we consulted the sacred chicken (haruspication, for word lovers) by running a Magee Evaluative Index. We were surprised to see that almost half of the Dow stocks are strong to very strong. Nine to 10 are weak to very weak. Magee used the MEI as a sort of oscillator. When 80% of the index were strong he looked for a top. When 8% were strong he looked for a bottom. Hunt continues for more chickens.

Two years of the Dow. A broadly whipping sideways snake. Could easily be divided into bear market of 04 ended by 04 election recovery and beginning of a mule market of three distinct phases to the present. We could also look at the entire two years as a sideways market.

Below, 10 years of the Dow. Since 03 we count about three serious attempts to scale the previous highs. If one goes back to the great sideways markets of 1965 to 1982 six+ attempts to surmount the 1000 level can be recognized. It’s difficult for us to look at this chart and project a serious market above 12000. We know there’s one born every 60 seconds, but a lot of them are still alive with memories of the great bubble of the 90s. Note the numerous crossings of the moving average here – always a vivid mark of the sideways market. One thing is true. From coiling markets like this great moves can develop.

Given the tottering economic situation (budget deficits, Katrina, Medicare drugs, foreign account deficit, Iraq spending out of control) and the vulnerability of the nation’s ports and infrastructure to a Muslim with a bomb we are not optimistic about the Dow. What we are optimistic about is gold.

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W.H.C. Bassetti
Adjunct Professor Finance and Economics
Golden Gate University, San Francisco
Editor John Magee Investment Series
Editor Coauthor 8th Edition, Edwards and Magee's
Technical Analysis of Stock Trends