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I have been promising this for some time, but now that I have settled into a bit of a groove, I will now begin to provide what I feel are the maximum and minimum ranges for the coming year. Note: This is NOT a forecast, as I think forecasts are virtually impossible to create with any degree of accuracy. These calculations and estimates are considered maximum and minimum possible ranges for trading activity for the year, based on current market action to date (and in this case on a MONTHLY basis, to make reasonable year long estimates).

There are some basic assumptions made to make the analysis a little simpler (simple models are the best in my opinion).

1) Up-legs and down-legs will have nearly perfect 1 to 1 symmetry.

2) Fibonacci levels will be considered most accurate when they align well with previous price resistance. (I think that is common sense, but I think it adds a level of confluence and accuracy to the measurement.

3) I do not JUDGE the measurements once they are made, these are defined as extremes to the upside and to the downside. The reason I do not judge them is that one has to allow for previous volatility calculations to influence the market reaction in either direction. When markets sell off violently, for example, they often can snap back quickly before resuming any previous trading tendencies. Ignorance of that tendency can really screw up position trading, so one should always be aware of worse case scenarios.

4) I may have a lot of experience with Fibonacci patterns, but I am not the expert. I use a lot of previous experence to drive my measurements. When I get to a point down the road, I will discuss the neural net trading concepts I use for swing trades, but what I will introduce here will be some basic concepts I use to measure swing moves.

I know that in hiphop lingo, swag is either a person's style or attitude, or promotional items for bands or events. In my lingo, swag stands for the old Georgia Tech engineering term, scientific wild-ass guess. That is exactly what I am going to present to you. I think you will find it helpful, even if only as an example of how I view what may happen over a given period of time.

If you think these models are not effective, take a look at a monthly forecast using such a method on the $INDU using a chart from 1974 to 2000. Note that the projected and actual highs were quite close. All that from a forecast first data point in late November of 1974. If you have followed some of my intraday set-ups on Twitter, I have used this same methodology. It works in all timeframes. It is not perfect, but you do not need perfection to make accurate projections.

 Lets start off with the Dow Jones Industrial Index, and continue on with the $SPX and $COMPQ.

2009 Dow Jones Industrial Average Playing ($INDU) Field:

 Instead of trying to describe a bunch of scenarios, I will just try to do one. It is my contention that we will likely see a January rally into mid-spring or summer that will ultimately run into major price resistance.

Bottom line: The maximum high should be around 10183, the low should be 5765 to 5809, and the target at year end should be right about where we are now, roughly 8780. I am assuming that:

1) Earnings will be ignored in quarter 1 2009.

2) Earnings will not be ignored in quarter 2 2009 (and by that time we will see what happens in international events I mentioned in other posts. New bank and commercial REIT failures will also have an effect on the second half outlook into summer). The auto bailout will likely fail, and that will cause legislative panic. Also, by May, we will have been though the seasonally positive November to May period of market activity.

3) Legislative bottlenecks for the "make work" infrastructure plans, bailout proposals, and other legislative agendas will be stalled out because states will not agree over projects nor the amount to which states will divy up the Treasury booty. I think this will be the biggest battle we have seen in Congress in quite some time and no party or leader will go unscathed. The market, however, will not like this uncertainty, and as earnings fall and unemployment rises, the summer doldrums will likely make the market sink. 

4) As fall begins, we might see a bit of light at the end of the tunnel regionally in the housing market on a regional basis, and the market will stage an end of year rally, ending about where it began. Note, however, that we might have seen that cycle bottom from which we historically see a 15-20% rally from. 8780 from 5905 is almost a 49% rise. Realize that this is not impossible because the 7 month average true range in December 2008 was 1308 points. If a 200% of a 7 month ATR is considered statistically outside the norm (and the width of a trail stop in this market), then that kind of a rally (2600 points) is indeed possible. Anything less than that kind of activity would basically be noise given the level of volatlity we have undergone in recent months when calculated on a MONTHLY basis..

2009 Standard and Poors 500 Index ($SPX) Playing Field:

Basically, take a look at this chart (which is the "best" case, but is the most likely case as well. The economic and world event factors are the same as was mentioned for the $INDU.

A rally to 1094 by mid-spring. A sell off past the previous lows to 571 roughly, and a rally back to 884 late in the year. The reasons are the same, but I think the S&P 500 is far more complex. I think that we may be locked into a decade long (or longer) channel trade between the current low (or lower low forecast here) and the 1576 high. I believe part of that will be caused by a struggle in the coming decade to overcome the banking crisis, combined with an ultimate increase in interest rates to pay for the printing press we are using to solve our fiscal problems. Earnings multiples will struggle to rise if any under the worst of these conditions. We will simply have to keep watching. If the dollar does become stronger as a result, the earnings of multinational corporations will indeed suffer, and so with the S&P 500 Index.

This is likely only going to get worse as we move toward 2014-2019 when Medicare is supposed to collapse. But for now, let us see what happens in the coming year and hope our elitist politicians care more about the country than they do the naked acquisition of partisan political power and the unquenchable thirst for re-election. I hope we as an electorate will be more thoughtful and seek and force term limits and better representation going forward if these problems worsen.

The NASDAQ Composite Index ($COMPQ) Playing Field:

To be honest, I am simply going to follow the rules with regard to symmetry, mainly because I have no idea how to gauge the driving factors in the NASDAQ in 2009. One would think that technology ultimately would triumph since most of America's future is hanging on the development of technology as our manufacturing base dwindles further. However, a potentially worsening economic situation might put a damper on technology sales, and that would be bad for this index. Basically, I see, using the same methodology (and assuming decent correlation between the indexes), a rally to 2074 that would happen by late Spring. The subsequent fall would be quite dramatic on the $COMPQ given its volatily, driving it into a momentum low (in the worst scenario) of 571 (crazy as that may sound), rallying late in the year to return basically unchanged. I have a really hard time buying such a scenario, but we have all learned to expect the unexpected in previous months, and if price symmetry continues unabated, it could indeed happen.  nonetheless, the key thing to take away from this is that there could be some unique buying opportunities as we head into the middle of 2009. For that reason, we need to be prepared for them if and when they arrive.

Summary:

We should expect more volatlity as the unwindings of the banking and mortgage mess continue. More industries will line up to the never-ceasing Treasury printing press, and more bank and REIT failures are in the cards in all likelihood. We must continue to expect great volatlity and hope that the end of this year will bring us the end of wacky governance and a return to banking confidence. I think that if the uptick rule and the rudiments of Glass-Stegall are reinacted, we might even be capable of raising risk capital at some level. That of course, would require the reconstruction of investment banks, and under this pseudo-socialist bunch (in both parties), I doubt that is likely to occur immediately.

For those in the 20s and 30s, these momentum lows might be a great time to add to the equity till in your investment portfolios, because if there are any sane people left on Capitol Hill, there will be every attempt made to restore free market conditions in equity markets. For those who are older, one will have to make decisions on an ad hoc basis. This will be a hard environment for those who seek to add to their retirement tills, but if the Treasury market stablizes (perhaps after its own bubble phase), one might be able to diversify risk across various asset classes. But this year will be another violent year I am afraid. Throwing all one's assets into one class is likely not the best of ideas. One must have an extremely long-term horizon in mind to do that. The other alternative would be owning an asset that all that printing press money is going to run to when inflation returns. The Fed and the Treasury are doing all that they can do to make inflation happen.

Is this really the way it will turn out? Probably not exactly, but at least I have some kind of initial framwork to analyze.

As the year progresses, I will try to get a better bead on momentum highs and lows. I am not exactly sure how I will handle that format, but I will allow it to evolve based on experience and readers comments. I am in the process of fixing the comment features of this blog.

Stay tuned and have a profitable 2009.