Dow Jones Ind. Average (sharp drop follow-up)
Over the 29 trading sessions from 29th December 2015 onwards until Thursday, 11th Feb. 2016 (Market-Close), the Dow has fallen more than 11%. Mark Hulbert analyzed all data back to the late 1800s, when the Dow was created.
What he found is summarized in the chart above. Notice that the stock market’s subsequent returns following losses this big and fast were, on balance, better than the average of all days over the last 120 years.
The last time prior to this year (2016) in which the market fell at least 11% in 29 trading sessions was in the summer of 2011. Over the subsequent three months the Dow rose more than 8%, and in six months’ time was almost 20% higher.
Needless to say, the market hasn’t always rebounded following losses this steep. But it does more often than not.
And that’s precisely what contrarian analysis would suggest. Drops of greater than 11% in just 29 trading sessions are rare enough and painful enough to lead many, if not most, shorter-term investors to throw in the towel. That in turn sets up the sentiment preconditions for a powerful rally - even if the big drop occurs within a longer-term secular bear market.
Q: What would that mean from a starting point of 15,660 points in the Dow as per 11th Feb. 2016 (Thursday-Close)?
♦ Well, an increase of 8% until Mid-May 2016 would lead to a Dow-level of over 16,912 points (= reaction-move yr 2011)
♦ Otherwise one may also count on an an index-rise of 8% until Mid-February 2017 (please recheck the column above)
Please follow the developments in the Dow within the next 6 months in the -daily updated- chart below!
original article: http://www.marketwatch.com