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Dow may go as high as 16,000 Back  
Where next for the Dow? Technical guru Kieran Horlacher looked back over 20 years to answer this question.
It was once referred to as the greatest bull market in history. After 20 years of living in a limbo situation, the question to ask is is the greatest bull market in history over or not. In short, the most likely answer is no.
The history of the modern bull markets of the Dow Jones and indeed, the bull markets of most established global markets dates back to a small break out in August 1982. Then trading at a relatively modest level in the region of 600 points, technical analysis guru Bob Prechter predicted a Dow high in the region of 4,000. Such remarks were treated with much derision by conventional analysts.
Indeed Prechter’s prediction was seen by many, including himself at the time, to have been achieved when in August 1987, the Dow rose to a level close to 4000. In many eyes, the sequence of events and particularly the October 1987 crash, covered in an early edition of Finance, seemed to give credence to this. However, subsequent events proved this incorrect.
The movements in financial markets follow a logical, if sometimes incomprehensible sequence. In essence a bull market has three upward legs and two corrective legs. The second upward leg is normally by far the longest and most impulsive leg.
As regards corrections, the first corrective phase is normally sharp in percentage terms, typically retracing in the region of 60 per cent of the upward leg. The second corrective leg tends to be more complex in structure, less volatile in terms of retracement, not normally exceeding 40 per cent and carrying many false dawns and hopes.
There is also another significant difference between corrective legs. Alternation, a difference in the shape and structure of the corrective legs is also a pre-requisite of corrective moves. One corrective phase, in its structure is sharp and quick. The other corrective phase is long drawn out and tends to be relatively flat in terms of appearance.
The most appropriate structure of the modern history of the Dow Jones would show:
• The first upward leg from August 1982 to August 1987 from Dow points circa 600 to 4000 a move of 3400
• The first corrective leg August 1987 to October 1987 from Dow points circa 4000 to 1600. A correction of 2400 or just in excess of 66 per cent.
• The second upward leg commenced in October 1987 at 1600 and lasted almost 13 years to January 2000 when it topped out at a level of circa 12,000. This upward leg had all of the appearances and hallmarks typical of a second upward leg. Long and sustaining rallies, small and short corrective phases and continuing momentum. The rally itself was a massive 10,400 points.
Corrective phases in financial markets carry out a number of purposes. It is an opportunity for market professionals to take stock and accordingly profit from well-established positions.
However, probably most important is that it is the pain barrier that phase in the market cycle when hard decisions have to be made and investors who have bought in at incorrect levels, usually close to significant tops, on a wave of positive physiological euphoria must take the pain of losses, indeed, sometimes significant losses.
So what can be expected to now unfold? The bottom of circa 8,000, in the wake of the September 11 sell off is a good mark to look at in terms of potential and possible basing. It represents a correction of circa 4,000 Dow points, in the region of the 40 per cent correction requirement as set out earlier in this article.
However, it is unlikely that the base, seen in September 2001 is the actual bottom of the corrective cycle. In order for the alternation to be achieved, some false dawns must be seen.
The likely structure of the Dow is that it will continue on a temporary upward cycle, with the recent February 2001 lows circa 9,500 acting as support levels. A false hope, a movement back towards 12,000 should not now be ruled out within the next 6 to 9 months. However, investors beware, this is not likely to prove to be the continuance of the bull market.
More pain and uncertainty must be endured. In order for alternation to work effectively, a further period of consolidation is required. This would see the market move back, in a downward and possibly sharp movement to once more test the September 2000 lows.
Once this target is achieved, all weak investors have been finally eliminated and fresh positive sentiment emerges, then the Dow can finally commence on the final phase of the greatest bull market in history.
What is the likely target? 16,000 would not seem unreasonable. But beware; this is a long-term market. We have been in consolidation for in excess of two years. It is not unreasonable to expect a further 18 months to two years of consolidation to the end of the current corrective phase.

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