Buy The Rumor ...

11/06/08 11:13:28 AM

by Koos van der Merwe

...Sell on the news. Is this still the case?

Security: DWIX
Position: Sell

Before the American election day, the rumor was that Barack Obama would become the next President of the United States, and on Election Day, November 4, the Dow Jones Industrial Average (DJIA) moved up strongly, closing higher by more than 200 points. If the rumor became fact, according to the old saying, the DJIA would fall on Wednesday, November 5. If, on the other hand, John McCain won, the DJIA would probably continue to climb, not because of Republican financial policy, but because the rumor was false.

Figure 1 is a daily chart of the DJIA at the close of the market on Tuesday, November 4, suggesting the following:

a. A rising price on falling volume suggests weakness.
b. An RSI that is close to a falling upper trendline, suggesting weakness ahead.
c. Fibonacci levels suggest that the DJIA could rise to test the 10,268.63 level (38.2%), but if we were to follow the "sell on the news" part, then the DJIA should fall.

That was a few days ago.

FIGURE 1: DJIA, DAILY. Here's the chart of the DJIA the day before Barack Obama was elected President of the US.

Graphic provided by: AdvancedGET.

Barack Obama has now been elected the next President of the United States. The rumor is now fact, and so the DJIA should now fall, according to the old saying. So what happened?

At the time of writing, the DJIA is down 343 points.

FIGURE 2: DJIA, DAILY. Here's the chart of the DJIA the day after the election.

Graphic provided by: AdvancedGET.

Figure 2 shows how the DJIA is falling, and I expect it to fall some more in the final leg of wave C, either to or below the 7777.32 level. Whether it does or does not fall to this level is immaterial. What is important is that the bottom of wave C will have been completed, figuratively, the end of the bear market according to wave theory, but not necessarily the end of the recession. Waves I and II have still to occur. This can take a year or longer, with wave II falling 72% the rise of wave I.

Once again even with a Presidential election, it is buy on the rumor and sell on the news.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.