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The attached chart shows a plot of the NDX lows from late 1985 until
3/2/2001 with three trend lines: (1) a trend line connecting the 1987
and 1991 lows, (2) a trend line based on the linear regression of
all the lows recorded in the 1991-1995 time frame, and (3) a
trend line connecting the 1996, 1997, and 1998 lows.
As shown, NDX at present has broken the 1996,7,8 trend line, or
at best is testing that trendline. If NDX trades lower from
here, it has technically broken the trend established by the
steep rally beginning in 1996. At that point, we need to look
at the next lower trendline which projects an ultimate low in
the 1300 range (about -30% below current levels) in the mid-2002
time frame. If that level were not to hold then we turn to the
trend line established by the 1987 and 1991 lows, or about 550
in the 2004 time frame (about -70% below current levels). Such
a severe decline would erase the gains of the previous 9 years,
and yet, would still be consistent with a longer term price
appreciation of about 9% per year on a pure price basis (or
close to 5% or 6% real return, after adjusting for inflation).
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