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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Busted
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 02/17/2017
20,624 4.28 0.0%
9,495 20.41 0.2%
672 1.27 0.2%
5,839 23.68 0.4%
2,351 3.94 0.2%
YTD
4.4%
5.0%
1.9%
8.5%
5.0%
Tom's Targets    Overview: 02/14/2017
20,750 or 19,800 by 03/01/2017
8,800 or 9,700 by 03/01/2017
700 or 640 by 03/01/2017
5,950 or 5,650 by 03/01/2017
2,400 or 2,260 by 03/01/2017
Indus strength: None YTD
Mutt Losers: None YTD
Mutt Winners: None YTD

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

This article looks at the historical performance of the Dow Jones industrials over the last 10 years according to forecasted behavior and how the Dow is expected to move in the coming decade.

Updated: 1/1/2017.

 

Background and Methodology

The December 2011 issue of Active Trader magazine had an article titled, "Looking ahead to 2012" by Larry Williams. In it, he describes a method to forecast the future by using historical price behavior. In an earlier article, "Cycles and seasonals: A 2011 roadmap, January 2011," he provides a similar review.

Both articles are based on the work of Edgar Lawrence Smith in the 1930s. Smith said that the stock market followed a 10-year cycle. Each year tended to repeat the behavior of the year a decade earlier. In other words, if you averaged all years ending in 1 (2001, 1991, 1981 and so on), that would give you a forecast for 2011. For 2012, you'd make a similar average, only use 2002, 1992, 1982, and so on.

That's what I did.

Warning

While the approach sounds easy, it does have some problems as you move from the monthly to weekly to daily scales. Monthly is easy. You take the closing price at the end of each month for all years ending in the target year (meaning 2001, 1991, 1981 and so on for years ending in 1) to get the forecast. Events like 9/11 where the markets were closed from 9/11/2001 to 9/16/2011 didn't matter much. I used the close closest to the end of the month. However, on the weekly and daily scales, those become a problem.

The daily scale is worse. January 3 might be a Tuesday in one year but it's a weekend in another. The average of those will be a mess because you could be leaving off big numbers. For example, back in 1928, the Dow was below 300. Today it's over 11,000. Leaving off the 11,000 reading will make the average of what remains much lower. Thus, the line tends to jump all over the place.

In that situation, I just used the prior day's close and copied that into the weekend (or into other gaps, like 9/11) and averaged the values as normal. That helped smooth out the curve.

Let me also say that my data only goes back to October 1928 (which I discard since it's not a full year). Williams appears to use data going back to 1900 and perhaps earlier. His results are more accurate than mine. In other words, the peaks and valleys you will see on my charts will be earlier or later than his. He may show an up trend and my charts do not. It's because of the missing data. For example, my charts use 8 samples and his use 10. That may not sound like much but it's huge when you are dealing with numbers that range so widely.

The monthly charts are the most accurate, followed in order by the weekly and daily charts.

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2017 Forecast

Picture of the Dow industrials forecast on the daily scale.

Pictured above is the forecast for the Dow in 2017, using the daily scale. The vertical magenta lines show important turns.

The Dow starts the year at its low and climbs from there until mid February. Then price eases lower in a choppy trend until bottoming in April.

Following that, we get a nice climb during the summer, to late July. The Dow makes a dramatic move lower into August and then recovers to peak in October, reaching the high for the year.

Something happens in October which sends the Dow plunging into November. The index recovers a portion of the decline by year end.

2017-2027 Monthly Forecast

Picture of Dow industrials forecast on the monthly scale.

This is the Dow forecast made on 1/1/2017 using the monthly scale and it covers a decade of price movement. The vertical magenta lines show important turns.

Price is fine during most of 2017 until the Dow peaks in October. Then the big decline starts in what looks to be a bear market lasting to 2019. Then we get a nice run up which continues until at least 2027.

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2016 Historical Forecast

Picture of the Dow industrials forecast on the daily scale.

This is the forecast for the Dow in 2016 (red), using the daily scale, accompanied by the actual Dow price action (black). Notice how close the predicted value was to the actual. Wow.

2015 Historical Forecast

Picture of the Dow industrials forecast on the daily scale.

This is the Dow industrials on the daily scale in 2015 (black) and the predicted path (red) of the Dow.

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2014 Historical Forecast

Picture of the Dow industrials forecast on the daily scale.

Pictured above is the forecast for the Dow in 2014, daily scale.

2013 Historical Forecast

Picture of the Dow industrials forecast on the daily scale.

This is the Dow industrials on the daily scale in 2013 and how it was predicted to do. Both the prediction and the Dow start the year from the same value.

The method predicted that the year would be a good one for the Dow. It was.

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2012 Historical Forecast

Picture of the Dow industrials forecast on the daily scale.

This is the Dow industrials on the daily scale in 2012

In May, the prediction headed lower, but the Dow turned up in June.

2011 Historical Forecast

Picture of the Dow industrials forecast on the daily scale.

This is the Dow industrials on the daily scale in 2011.

The prediction did quite well in 2011. It may have peaked or hit a valley a few weeks out of synch, but it did predict a bumpy year.

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2010 Historical Forecast

Picture of the Dow industrials forecast on the daily scale.

This is the Dow industrials on the daily scale in 2010.

The prediction was off this year. The drop predicted to start in September and bottom in October never appeared.

2009 Historical Forecast

Picture of the Dow industrials forecast on the daily scale.

This is the Dow industrials on the daily scale in 2009.

Although the prediction ended the year very close to the actual, it missed the large decline in March.

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2008 Historical Forecast

Picture of the Dow industrials forecast on the daily scale.

This is the Dow industrials on the daily scale in 2008.

This was another year that the index and the prediction missed each other. The Dow dropped even as the prediction said it would rise. If you invert the prediction, it would have been closer to reality.

2002-2011 Historical Forecast

Picture of the Dow industrials forecast on the monthly scale.

I show a picture of the Dow industrials from January 2002 to November 2011 on the monthly scale as candlesticks. Below that is the forecast using the method described earlier in this article.

At A, the index turns higher but the forecast had already shown the index moving up.

At B, the index hit a relative peak and so did the forecast.

At C, both began the move higher into the peak at D.

At D, the index started the bear market run. The forecast showed the index peaking a few months earlier. That's ok, since it gives a good warning to begin liquidating.

The move from D to E shows the index plummeting but the forecast has it trending marginally higher.

Finally, the move from E to F shows the index recovering but the forecast is flat.

In other words, the forecast works some times and doesn't some times. My view is it's better than nothing. Clearly, in a few thousand years, when sufficient samples are available, it may be worth trusting. But until then, keep in mind that it could be inaccurate.

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2012-2015 Weekly Forecast

Picture of Dow industrials forecast on the weekly scale.

This is the Dow on the weekly scale, showing as much as I can fit on the chart.

It shows 2012 with a low in October and a nice climb from there, going into 2015. Clearly 2012 is not going to be a pleasant year but 2013 is going to be a buy-and-holder's dream!

At least for a year... 2014 shows price going nowhere except down slightly until near year end with a resumption of the move up starting in October and continuing to the end of 2015.

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2012-2021 Monthly Forecast

Picture of Dow industrials forecast on the monthly scale.

This is the Dow forecast made on 11/27/2011 using the monthly scale and it covers a decade of price movement.

We see the same bottom in 2012 before a rise up to 2017. In the summer of 2017, the Dow peaks and begins what looks to be a bear market going into 2019. Then we get a bounce up which lasts until mid 2021.

When you think of the current economic picture and world events, this forecast is plausible. 2012 is going to be a rocky year just as this year has been.

After that, the world's economies should get in gear and the stock market should reflect that by posting higher highs.

If this forecast is correct, buy and hold should consider taking profits in early 2012 and then buy back in October with the potential to hold on to 2017.

-- Thomas Bulkowski

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See Also

  • Best buy days. Which day of the week is the best one to buy or sell?
  • Best buy months. Can buying at the end of the worst performing month and selling at the best performing be profitable?
  • Holidays. Does the market rise or fall before and after holidays? Answer: Fall.
  • Seasonality. What are the best months to buy and sell stocks?
  • 1-2-3 trend change. How do you know when the price trend is changing?

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. A closed mouth gathers no foot.