Ask Mike:
What is a 'Consolidation Period'?

Question:

Barry from LA, writes:

It has been interesting to read your weekly commentaries on the direction of the market. I find it some of the best directional insight in the market and want to commend you on your effort and accuracy.

Many times this year, you have alluded to a 'consolidation period'. Would you explain what you mean by that term and how it plays into your opinions on the direction of the market.

By the way, I have subscribed to services costing many times what you charge and, in comparison, TurnerTrends is far more accurate and provides much better investment information. Keep up the great work and the great service.

Sincerely,

Barry

Mike's Response:

Hello Barry,

Thank you for your question and very kind remarks.

In order to explain my use of the term, 'consolidation period', it would probably be best to go into some detail about our approach to market forecasting...

We use 3 primary inputs for our analysis of the near-term direction of the market:

1. The historical movement of the Dow Jones Industrial Average
2. The weekly, monthly and historical trend of Investor Sentiment, and
3. The current geo-political and global economic issues.

We have charted the Dow from 1900 through the present time. This chart is what we call our 'Roadmap' of the big-picture of the market. It completely removes such issues as wars, terrorists, geo-political events, interest rates, etc. from the analysis process. It focuses purely on the pricing changes in the Dow, over time.

From this chart, several interesting observations can be made. One of those observations is the occurrences of 4 'consolidation periods'. A consolidation period is span of time (generally several years in length) where the Dow trades in a well-defined range.

There have been 4 such consolidation periods in the last 106 years, including:

• January 1906 through December 1924
• January 1937 through January 1950
• January 1966 through October 1982, and
• January 2000 through today

The average duration of these consolidation periods is 12-15 years.

So, if history is any guide to future trends, one could assume that we are somewhere near the mid-point of the current consolidation period where the Dow will trade between a high of 11,720 and a low of about 8,000.

When we look at the market and attempt to determine a likely direction, one of the 3 primary considerations is where we are on the 'Roadmap'. As the Dow gets closer to its upper resistance level of 11,720, we begin to get more aggressive in our stop loss settings, since it is likely the market is approaching a top. As the Dow gets closer to 8,000, we begin to get more interested in buying stocks than shorting.

Of course, the Roadmap is only one of our primary inputs. Please read my 'Ask Mike' for more explanation of this process. I will be expanding on this discussion in upcoming newsletters.

Thank you for the question, Barry.

Regards,

Mike