Ask Colin

Is it unreasonable to assume that the current trading range (August 2005) could last until the end of the decade, if not longer?

The detailed question was:

Given that the Dow went virtually nowhere from 1965 to 1985, then more than quintupled from 1985 to 2000, is it unreasonable to assume that the current trading range could last until the end of the decade, if not longer?

Let me deal with your premise first and then look at your proposition.

Your premise is that the Dow went nowhere 1965 through 1985. I only have monthly closing prices up to 1971, but after that, I have complete range data. The period 1965 through 1985 showed the following movements on the Dow:

1965 peak of 984 to 1966 trough of 774 (-21%), to 1968 peak of 985 (+27%), to 1970 trough of 684 (-31%), to 1973 peak of 1051 (+54%), to 1974 trough of 577 (-45%), to 1976 peak of 1014 (+76%), to 1978 trough of 742 (-27%), to 1981 peak of 1024 (+38%), to 1982 trough of 777 (-24%), to 1984 peak of 1287 (+66%).

I don’t believe you can describe this period as “went virtually nowhere”. For one thing, it included the bear market of 1974, which was a highly traumatic period – I know, I lived through it.

The only thing that I believe can be said about this period is that the Dow experienced great problems rising above ROUGHLY 1000 points until 1983 (the move began in 1982) - NOT 1984. There was therefore a strong resistance level around the previous highs that was reinforced each time a bull market swung up to it. Since then, the rise has been remarkable – roughly ten-fold (not quintupled) in 18 years.

The first problem with your proposition that we are in for a long period in the present trading range on the Dow is that it is based on a false premise. However, let’s explore it further.

The present trading range (2004-05) is roughly between 10,000 and 11,000 points. These levels are likely to be support and resistance levels – charting theory suggests that quite strongly. However, there is nothing in charting theory to suggest that they will hold for a decade.

I think that the larger pattern is the big 1999-2001 trading range. This seems to me to be exerting great influence over the present trading range, in that the trading in that period between roughly 10,000 and 11,400 points is a strong resistance level. It is possible that it could represent something of a ceiling for a decade or more – who knows, though, and why only a decade? – for two reasons:

Firstly, because it is such a strong resistance level.

Secondly, because the Dow has got way above its long term trajectory and there is a well-known tendency for markets to revert to the mean. In fact, they usually over-shoot on the downside as well.

You will notice that I have not referred to the 1965-84 period in this reasoning. This is partly because I do not see it as a trading range, but a series of bull and bear markets. More importantly, the reason is because of the law of small samples. Just because something (supposedly) happened once before, does not mean it will happen again. It might, but it would still be co-incidence. It is on a par with the pundits who trot out the 1929-32 chart at the end of every bull market. History has a tendency to repeat itself in very general terms given similar causes. However, it is not exact and there are plenty of exceptions.