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Stock Market Prediction for 2019 and Beyond

As we head into the New Year, maybe you’ve noticed that the stock market isn’t doing so hot. I have reason to believe we’ve reached a critical turning point this winter, and on the way, I’ll explain the basics of linear analysis for stocks. Linear analysis is a strategy used by experts and amateurs alike to predict the stock market using (you guessed it) lines. It’s not an exact science, but then again, divination never is… *peers into crystal ball*

I’ll be analyzing the Dow Jones Industrial Average, one of several stock market indexes, or ways of measuring the market. The Dow Jones simply sums the stock prices of 30 large, public companies that may be representative of how company stocks do overall; companies such as Apple, Walmart, Disney, and Nike are included in the Dow 30. My first word of advice is to use a logarithmic price scale for linear analysis (just change the settings of the graph on Yahoo Finance). It responds better to skew than a linear scale which tends to favor larger numbers. I don’t like math and don’t understand logs myself, so if you’re curious, this link explains exactly why: https://www.investopedia.com/ask/answers/05/logvslinear.asp

(All screenshots from finance.yahoo.com.)

Let’s see what happened to the stock market for the past 6 months, the above. We had a high point in October 2018 around 27,000 points. (Points are the sum, in dollars, of the Dow 30’s stock prices, meaning in October the sum of the 30 stocks were around $27,000.) This gradually dropped around 5,000 points to a low on Christmas Eve. From there, we recovered around 40% of those 5,000 points to what is now around 24,000 (accurate numbers are not important). So that’s what actually happened. Now let’s go to the 2 year graph below:

This graph shows a horizontal line I drew that has been confirmed 5 times by different critical points (the market touched the line and bounced back). This is our line of sustenance; it shows that the market was sustained at this line– meaning this was the price that it did not fall too far away from. However, by Christmas Eve we can see that it broke the trend by falling very far away from it, indicating a new downward trend. We can best see why that is from the 3-year graph:

From the above, we can see that growth followed this general line from the lowest point in February 2016. Now the current market has broken through the line and is forming a new trend: a period of descent.

Go back to the 2-year graph above. Drawing our previous line of sustenance in, we can see that the graph has a curious M-shaped double peak. Draw a line of descent connecting the peaks from when the descent started (the second peak of the M) on 9/17/18 and you get the predicted downward trend of the market.

From the line of sustenance we can see the M shape started at 11/27/2017 and the second peak (where things started to decline) was at 9/17/2018. That’s a period of 10 months of transition, where the market is transitioning from a bullish (growing) market to a bearish (declining) market. How long will the decline last? Typically, the first wave of the descent will mirror the length of transition, so this’ll last until around 10 months as well, to July 2019.

Now, just shifting the graph a bit to the left leaves space for predictions about how many points it’ll be in July. Assuming the period of descent lasts until July 2019 and following the line made by the beginning of the new trend, we can predict that the market will sustain itself (level off) at around 20,000 points. The psychology of markets dictate that buyers and sellers will like that nice whole number as well. (Learn why whole figures are “psychologically important” here: https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/06/14/Psychological_Whole_Numbers.html.) But let’s now look at what might happen after this period of sustenance by moving to the 5-year graph:

February 2016 is our key date, because that was the beginning of the period of growth (bull market). We can see that there are two lines of sustenance formed in this critical area: one line at around 18,000 points and one at around 16,000. In the long-term, the market is headed toward these two lines. We don’t have enough information to tell when that will happen, but the market seems to like to stabilize between 18,000 and 16,000 points (maybe around 17,000). It won’t be for a while yet, though.

Now, that seems like a pretty big drop: 16,000 points, after all, is more than 10,000 points lower than our highest of almost 27,000. But if we zoom out and look at the above graph (the most stock history Yahoo Finance will give me, all the way from 1985), that range doesn’t look so bad. We’ve been consistently outperforming the line of growth: two large arcs separated by the low point from the crash in 2009. This line is the market’s end behavior: if the market hits 16,000-18,000 points, it would not surpass this line, it’ll just touch it like what it did in 2009. Our 16,000 to 18,000 point range is a safe zone. Once the market gets in this range, it’s safe to start buying stocks again.

Let’s review what we did. First, we found the line of sustenance for the past year. Next, we proved that this line of sustenance has been broken through and we are now entering a new phase. Next, we determined how long that phase will last before the market sustains itself again (levels off, does not rise or fall). After that, we found around what point value that sustenance will be. Later, we found that sometime in the long-term future, the market will drop to its next lines of sustenance. Lastly, we established that however far it drops, it doesn’t change end behavior (a continuous trend of always going up).

That’s the basics of linear analysis. There’s other things attached to it, of course: stuff to do with the Golden Ratio and stock market psychology and percentages, and people spend many years learning how to do it for a living. Not everyone who invests does it themselves; most people just pick some good companies and stick with them, and some will hire an analyst to do it for them. But guess what? It’s all lines and estimates in the end, no matter how complicated it gets. Sometimes, no matter how much math a person does, they just can’t get the character of the stock market and will go wrong– because people participating in the market are irrational and unpredictable sometimes, the market itself is too. So really, it’s anyone’s guess.

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