2020 left us with a problem. The year generated an engulfing bar on two out of three indexes (DJI & SPX).
An engulfing bar is a bar in which the high is higher than last bar and the low is lower than last bar.
For the DJIA, since 1896, there have been 8 engulfing bars before 2020.
1937 (83 point range), 1949 (40 point range), 1953 (40 point range), 1960 (123 point range), 1966 (265 point range), 1973 (283 point range), 1980 (279 point range), 1982 (304 point range) and finally 2020 (12,423 point range).
As the yearly average range has grown from 1896 to 2020. This year, the range average is 3662 points and the true traded range is 3.39 that average. This is the “caution flag”.
How does this compare to the others?
1937 = 1.41x the average (58 points)
1949 = .69x the average (58 points)
1953 = .97x the average (41 points)
1960 = 1.98x the average (62 points)
1966 = 2.62x the average (101 points)
1973 = 1.83x the average (154 points)
1980 = 1.43x the average (195 points)
1982 = 1.46x the average (208 points)
2020 = 3.39x the average (3662 points)
Bull Envelopes:
1949, 1980, 1982, 2020
Bear Envelopes:
1937, 1960, 1966, 1973
Neutral Envelopes:
1953
1937: Bear Envelope. Erased 1.5 years of growth.
Generated price target of: 98.73.
Low of 1938: 97.46
Close of 1938: 154.36 (+27%)
However the high of 1938 (158.90) was not broken until 1945. The low was revisited in 1942.
1949: Bull Envelope.
Generated price target of: 236.36
High of 1950: 236.63
Close of 1950: 235.42 (+17%)
1953: Neutral Envelope.
Generate price target of: 306.63
High of 1954: 407.17
Close of 1954: 404.39 (+43%)
1960: Bear Envelope.
Generated price target of: 592.20
Low of 1961: 606.09
Close of 1961: 731.14 (+ 18%)
The market rallied in 1961. In 1962 the market witnessed a low of 524.55
Close of 1962: 652.10
1960 close – 1962 close (+5%)
1961 close – 1962 close (-15%)
1966: Bear Envelope.
Generated price target of: 719.86
From 1967 – 1969 the high and low of the 1966 envelope had not been broken.
In 1970, the market saw a low of 627.46
1973: Bear Envelope. Erased 15 years of growth.
Generated price target of: 791.71
Low of 1974: 570.01
Close of 1974: 616.24 (-27%)
1980: Bull Envelope.
Generated price target of: 1084.86
High of 1981: 1030.98
Close of 1981: 875.00 (-9.2%)
1981 did not break the low of of 1980.
1982: Bull Envelope.
Generate price target of: 1383.09
This close is unique and not seen again until 2020. It is an evelope with a close higher than all previous bars.
High of 1983: 1291.67
Close of 1983: 1258.63 (+20%)
Target high was not reached until 1985.
2020. Bull Envelope.
Generated price target of: 36532.56
But when?
Twice in history have we encountered yearly envelopes of greater than 2x the average trade range. 1966 and 2020. The first was a bear envelope and generated a 3 year stall in the market.
2020 could have just stalled the engine for ~6 years.
Of all the indicators I monitor. Looking at the yearly model. Many are pegged out at the top and one, the Baseline Stength Indicator with all of the growth for 2020 has flagged the year as year one in a stall.
However, what is of main note of this history lesson is the range.
Historically when we witness a envelope that is 2x or more of the average trade range, the following bar is an adjustment bar. Typically adjustment bars are bars that trade between the high and low of the previous bar.
If this is the case, 2021 could be another roller coaster ride.
With the ranges of the major indexes so far above their trade ranges and trend averages. I begin feeding the data into my “correction calculator”.
The results were interesting.
From a Dec 31, 2020 high.
DJI could correct 16.26% to 25,624
SPX could correct 12.25% to 3,295.57
NDX could correct 9.07% to 8,835
This is of course if the pandemic does not more damage to the economies of the world than already measured.
On the other side of the coin.
2019 Generate Price Targets:
DJI: 30786.37 (Open)
SPX: 3459.42 (Reached)
NDX: 9400.86 (Reached)
2020 Generate Price Targets:
DJI: 32052.22
SPX: 4023.03
NDX: 13680.74
The question to be asked is not “if” but “when”. These price maybe reflective of 5 years in the future. Or February 2021.
One of the issues encountered in price projection is that there has been a scale generated for a multiple dependent on the strength indicators. The strength indicators are now pegged out at above 99. This places the multiple into a converative mode. Calculating for minor upward movement in anticpation of a change of direction.
Years the stength indicators have been above 90 by the close of the year:
1905, 1909, 1915, 1924-1929, 1945, 1950-1956, 1958-1959, 1961, 1963-1965, 1972, 1982-1983, 1985,-1986, 1989, 1991-2000, 2005-2006, 2012-2017, 2019-Current.
The years which pegged over 95 generally shortly after generated a stall or a correction.
1905, 1915, 1924, 1927 – 1928, 1935 – 1936, 1944 – 1945, 1950 – 1952, 1954 – 1956, 1958 – 1959, 1961, 1963 – 1965, 1983, 1985, 1989, 1991, 1993, 1995 -1996, 1997 – 1999, 2006, 2013 – 2014, 2016 – 2017, 2019 – Current.
The average is 2 years in the cycle of over 95. After that, the follow on year is either a correction, or a stall (prices stay may have begun moving up a little higher, but generally return to within the previous bars levels).
We are balancing ever so delicately on the edge of a blade. If the knife falls, don’t try to catch it. Just jump out of the way, places your stops accordingly.
I am just waiting for someone to breath of this house of cards.
On a side note:
The reason so many individual investors were able to get rich quick was that 2020 erased 3.5 years of growth in two months, then did in 9 months was took 3.5 years to generate by returning all that growth. But the music could now be over.
Trade the coming year carefully. Use proper risk management.
Happy New Year!
-Price Prophet.
Orion Price Prophet 