For this week, access to much of Elliott Wave International’s forecasts and chart work is free. Many traders and investors boldly proclaim that technical analysis, such as that provided by Elliott Wave and others, is akin to voodoo and advise investors to stick to the fundamentals. To which I reply: ignore technical indicators at your peril. Such avoidance/arrogance (you think you are so much smarter than the market) is particularly damaging to portfolios in two instances. One, when they involve macro themes which the names in your portfolio will be unable to escape. Two, when the change in trend only occurs after a long period of time: The longer the period before trend reversal or violation, the more powerful the potential effect on your investment.

The following chart is from Elliott Wave Internation

We see that we have demonstrably violated the trend lines for the bull markets for the Dow Jones Industrial Average dating back to 1982 and 2003. It appears likely that we are going to test the trend line for the market dating back to 1974 for the third time this year. The market was unable to sustain a move above the 1982 and 2003 bull market trend lines during the market rebound following the Fed bailout of Bear Stearns on St. Patrick’s Day.

A violation of the 1974 supporting trend line could spell doom and start a mean reversion which would bring the average below 5000 as the chart provided by sharelynx.com indicates:

You can easily make the argument that the DJIA remains extended versus its 200-year trend line and is therefore still very vulnerable to a big correction. Few stocks would be spared in such a downdraft. Do you have a slightly greater appreciation for technical indicators? 200 years is a long time. If we are taught that movements always revert to the mean, then we are almost assured that a correction is inevitable. But when? It could be this week. I am surprised in the low reading of the CBOE volatility index (VIX) as we look to dive deeper and test the March lows in the S&P 500 and Dow Jones averages. Either traders are very confident that the March lows (and the supporting 1974 trend line) will hold or they are obliviously complacent and poised to endure much pain if it does not. The Nasdaq is holding up relatively well which is bullish as it tends to lead. The financial stocks have taken out their March lows and they also tend to lead the market. This is bearish. Perhaps market participants are betting this is the final washout for the financials and the market will soon move higher as all of the bad news is priced in. This song risks becoming a broken record.

The lows may in fact hold.