By William Kaiser, President - ZAP Futures

In March, I had the privilege of writing an article that was published on the CBOT Dow website. At that time we saw extremely negative fundamentals.  High oil prices, low consumer confidence and the threat of war had exerted downward pressure on the Dow.  In the face of all these negative fundamentals, however, the elements of a bullish technical pattern had the potential to emerge. I quote the following paragraph from that article not for bragging rights, but to set the stage for what might be one of the largest rallies in the history of the Dow.  

"On 7/23/02 the Dow made a low of 7679, followed by another low on 10/10/02 of 7170.  What followed was an impressive 24.4% rally to a high of 8920 on 11/27/02.  This chart pattern is called a W.H. Moore Bottom. This pattern occurs when a market makes a new contract low, rallies for a short time, makes another new contract low, has no follow through and then rallies sharply with gaps.  So where do we buy and where are we going?  A congestion pattern has been forming between 7700-8150.  There is also a gap in the charts at 7500-7570.  I would buy on a move down into the gap area. If we do not fill that gap, I would wait to buy a breakout above the highs of the congestion area, around 8150.  If we do fill the gap and then take out the 8150 highs, I would buy one at each level.  If we do see this market go higher, the second leg up is generally more reliable and usually will rise 20-40% more than the first leg.  The first leg was 1750 points, so projections for high of the second wave would be 2100-2450 points, or the Dow with a high between  9700-10,050" 

So where are we now?  We saw a low in the Dow into the gap area of approximately 7500 in March 03, followed by a sharp rally to the 9350 area in June 03. An aggressive trader would now be long two contracts, one at 7550 and another at 8150. The Dow currently is trading at about 9200 and the target is still 9700-10,500 if one assumes that the technical pattern is still in place. So far this year we have seen an impressive 10.5% rally, but we still need to go higher to fulfill the technical projections. The good news is that there are generally three legs up in a bull market.  The second leg should bring us to the 9700-10,500 area. But what factors could cause the potential third leg to occur? Very simple, George Bush Jr. will not want to make the same mistakes that lost Bush Sr. the election...THE ECONOMY!  A combination of a weaker dollar to spur exports, low interest rates and tax incentives that might even help low income individuals, should assure us of this.

Fundamentals aside, the technical outlook is extremely strong. I would count on a rally to the 9700-10,500 as a sure bet.  After a technical pullback of 25-35%, look for the third leg of the rally into election time of another 15-25%.  That would put the potential high of the Dow in the area of 11,150-13,125. These are exciting times in the markets, even though the public still has its doubts. The opportunities are there, especially in the CBOT's mini-sized Dow futures contract.  With the mini-sized Dow, you can buy all 30 Dow stocks in an instant with the push of a button. It is the easiest and most efficient way to trade stock indices. We are at a point in time where most investors are hoping to break even, or incur smaller loses in their current portfolios. Others are looking at this current time period as one of the best opportunities of their lives. Which one are you?     

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About William Kaiser
William Kaiser has been in the Futures Industry since 1968, starting his Futures career on the trading floor of the CME & CBOT as a runner. Over the years since, William has been a daily commentator on FNN/CNBC Television, presented numerous seminars, written many articles for industry publications and co-authored the book "The Art of Electronic Futures Trading" published by McGraw-Hill. Currently he is President of ZAP Futures, the first company to offer self-directed electronic futures trading to the public. Today, ZAP Futures is one of the largest firms in online futures trading.

If you would like to receive a FREE copy of the 260 page McGraw-Hill book "The Art of Electronic Futures Trading" visit ZAP website www.zapfutures.com.

If you trade CBOT Dow futures and are interested in submitting a strategy for publication on the CBOT Web Site please contact us.

The information in this commentary is provided from sources believed to be reliable, but the Chicago Board of Trade does not guarantee its completeness or accuracy. The opinions expressed within the commentary may change without notice. The commentary was prepared for general circulation and does not have regard for the particular circumstances or needs of any specific person who may read it. Neither the information nor any opinion expressed in the Commentary constitutes a solicitation for the purchase or sale of any futures or options contracts.