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Bulkowski's Forecast

Thomas N. Bulkowski

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer:
You alone are responsible for your investment decisions. See Privacy/Disclaimer for more
information. Some pattern names are the registered trademarks of their respective owners.

This article looks at the historical performance of the Dow Jones industrials over the last 10 years
according to forecasted behavior and how the Dow is expected to move in the coming decade.

Most recent update: 1/2/2019.

Forecast: Background and Methodology

The December 2011 issue of Active Trader magazine had an article titled, "Looking ahead to 2012"
by Larry Williams. In it, he describes a method to forecast the future by using historical price
behavior. In an earlier article, "Cycles and seasonals: A 2011 roadmap, January 2011," he provides a
similar review.

Both articles are based on the work of Edgar Lawrence Smith in the 1930s. Smith said that the stock
market followed a 10-year cycle. Each year tended to repeat the behavior of the year a decade earlier.
In other words, if you averaged all years ending in 1 (2001, 1991, 1981 and so on), that would give
you a forecast for 2011. For 2012, you'd make a similar average, only use 2002, 1992, 1982, and so
on.

That's what I did.

Forecast: Warning
While the approach sounds easy, it does have some problems as you move from the monthly to
weekly to daily scales. Monthly is easy. You take the closing price at the end of each month for all
years ending in the target year (meaning 2001, 1991, 1981 and so on for years ending in 1) to get the
forecast. Events like 9/11 where the markets were closed from 9/11/2001 to 9/16/2011 didn't matter
much. I used the close closest to the end of the month. However, on the weekly and daily scales,
those become a problem.

The daily scale is worse. January 3 might be a Tuesday in one year but it's a weekend in another. The
average of those will be a mess because you could be leaving off big numbers. For example, back in
1928, the Dow was below 300. Today it's over 24,000. Leaving off the 24,000 reading will make the
average of what remains much lower. Thus, the line tends to jump all over the place.

In that situation, I just used the prior day's close and copied that into the gap and averaged the
values as normal. That smoothed out the curve.

Let me also say that my data only goes back to October 1928 (which I discard since it's not a full
year). Williams appears to use data going back to 1900 and perhaps earlier. The peaks and valleys
you will see on my charts may be earlier or later than his. He may show an up trend and my charts
do not. It's because of the missing data. For example, my charts use 8 samples and his use 10. That
may not sound like much but it's huge when you are dealing with numbers that range so widely.

Forecast: Adjustment Factor, Aligning Scales

In some cases, I removed the 2007-2009 bear market influence on the predictions. By that, I mean
if I was looking for 2018's prediction, I'd skip any data from 2008 (which was in the middle of the
bear market). That means the chart will show a gap (big rise or drop) because we've lopped off a
sample. In that situation, I compute an adjustment factor which plots the new year starting at the
same value.

I also do this for some of the charts shown below. I want to begin the prediction and the actual price

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series (if there is one) using the same value at the start of the year. That way, I can tell what the
predicted ending year's value will be, as well as the yearly high and low values. The adjustment
factor is this:

Adjustment Factor = (Prior Close)/(Predicted Close).

Each new prediction is multiplied by the adjustment factor once it's found. By that, I mean I only
find one adjustment factor, the first one of the first year charted or if I remove the 2007 to 2009
bear market, I'll adjust the values to compensate for the missing years (and I remove the entire
2007, 2008, and 2009 years, not just the bear market from the prediction).

Simply put, this adjustment factor allows me to begin plotting the actual prices and the predicted
values at or near the same value as the actual price (or as the last predicted close).

Let me also say that I often don't use the first value in the prediction when computing the
adjustment. Why? Because January 2 is sometimes the first trading day of the year. Sometimes it's a
weekend. When you average the numbers together, the first few predictions might be, say, 20,000
when later predictions are all in the 24,000 range. Thus, I wait for the day-to-day prediction to vary
less than 5% before using the predicted value in the formula. Often, on the daily scale, that means
waiting one or two additional days. And that's why some of the charts don't show the predicted line
starting exactly at the closing price of the first day's actual price value.

Once I have the adjustment factor for the daily scale, I also use the same adjustment factor for the
weekly and monthly scales. That way, all of the charts begin at the same value. And that makes the
predicted yearly high and low closer to that shown on the daily scale.

All of these adjustments means the predictions of my charts versus someone else's
will likely be different. But if you follow these rules, using the same data as I am, you'll get the
same result.

Forecast: Monthly High Doesn't Match Daily High

One other thing. If you compare the highest (or lowest) predicted closing price on the daily scale, it
probably won't match the predicted close of the weekly or monthly scales. Why not? Because the
weekly scale uses Friday's close and the monthly scale uses the last trading day of the month. Those
can be far from the highest/lowest close found on the daily scale.

Forecast: Examples

Date Close Comments

12/31/1936 179.90 Note: First trading day is 1/4/1937
1/2/1947 176.39
1/2/1957 496.03
12/30/1966 785.69 First trading day is 1/3/1967
12/31/1976 1004.65 First trading day is 1/3/1977
1/2/1987 1,927.31
1/2/1997 6,442.49
12/29/2006 12,463.15 First trading day is 1/3/2007
2,934.45 Average of above numbers

Let's discuss a few examples for the Dow Industrials.

Suppose we want to make a prediction for 2017. We start with 1/1/2017 but that's a holiday. So we
skip that day and start with 1/2/2017.

The data I have goes back to late 1928, but we start with 1937, the first full year of data ending with a
7. The table on the right shows what I have.

When no trading occurred on the target date (1/2/year), then I used the prior close.

The average of those numbers is 2,934.45. That's far away from the current Dow's close of 24,386.

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Let's compute the next day's prediction: 1/3/2017. I show the data in the table.

Date Close Comments

12/31/1936 179.90 Note: First trading day is 1/4/1937. Use prior close
1/3/1947 176.76
1/3/1957 499.20
1/3/1967 786.41
1/3/1977 999.75
1/2/1987 1,927.31 1/3/87 is weekend. Prior close is this one
1/3/1997 6,544.09
1/3/2007 12,474.52
1/3/2017 Not used: We're trying to predict it
2,948.49 Average of above numbers

The average is 2,948.49

Because the two predictions are close, within 5% of each other, I use the first predicted close in the
calculation for the adjustment factor. The adjustment factor allows us to plot the actual price and
predicted price using the same scale. The first value of the two will be the same.

The closing price of the Dow industrials on the first trading day of 2017 is 19,881.76, so the
adjustment factor would be AF = 19881.76/2934.45 or 6.77529.

If you multiply each predicted price for the remainder of the year by 6.77529, you'll get an adjusted
price normalized to the current price. So the first plotted point would be 2,934.45 (the prediction for
1/2/2017) times 6.77529 or 19,881.76, which matches the first closing price of the Dow.

The next day's predicted close would be 6.77529 x 2,948.49 or 19976.87.

You'd continue this method for the remainder of the year and any succeeding year. Note that if
you're plotting multiple years, you only calculate the adjustment factor for the first day of the first
year. Then multiply that value by each predicted close for all remaining data (years).

2019 Forecast

This is the forecast for 2019, made after the close on 12/31/2018.

Notice that the market remains weak until late February or early March 2019 when it bottoms. After
that, the Dow makes a nice bullish run.

If the prediction is correct, then you should start to bottom fish (begin buying) in late February.

2019-2029 Monthly Forecast

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This chart shows the longer term prediction as of 12/31/2018.

This chart shows weakness in 2019 followed by nice upward run to early 2021. A little turbulence
sets in for about a year until mid 2022. Then it's up, up, and away until 2028 (notice a weak year
happens a decade after 2018...).

Notice a difference between the predicted low price on the monthly scale (22,159) versus the close
on the daily scale (prior chart, 21,526). The monthly scale (this chart) is more accurate because the
daily scale can have missing data (like the week's close during 9/11).

2018 Historical Forecast

The red line is the forecast for 2018 and the black bars are the Dow industrials on the daily scale.

Earlier in 2008, probably around the August blog post, I received an email questioning the inclusion
of 2007-2009 bear market data in the forecast. I thought the person made a good case, that the
2008 bear market wouldn't recur this year. So I removed the bear market data and posted the
results.

Clearly that was a mistake. If you include the 2008 bear market data in the forecast, then the above
chart is what you get.

Notice that if you invert the red line, it tracks quite closely the Dow industrials. The ending close
isn't the same, but it's a very good prediction in my view.

Unfortunately, I've no idea ahead of time whether we'll need to invert the forecast or not.

2017 Historical Forecast

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The red line is the forecast for 2018 and the black bars are the Dow industrials on the daily scale.
The actual close at year end versus the predicted close I show in the upper right of the chart.

2016 Historical Forecast

This is the forecast for the Dow in 2016 (red), using the daily scale, accompanied by the actual Dow
price action (black). Notice how close the predicted value was to the actual. Wow.

2015 Historical Forecast

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This is the Dow industrials on the daily scale in 2015 (black) and the predicted path (red) of the
Dow.

2014 Historical Forecast

Pictured above is the forecast for the Dow in 2014, daily scale.

2013 Historical Forecast

This is the Dow industrials on the daily scale in 2013 and how it was predicted to do. Both the
prediction and the Dow start the year from the same value.

The method predicted that the year would be a good one for the Dow. It was.

2012 Historical Forecast

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This is the Dow industrials on the daily scale in 2012

In May, the prediction headed lower, but the Dow turned up in June.

2011 Historical Forecast

This is the Dow industrials on the daily scale in 2011.

The prediction did quite well in 2011. It may have peaked or hit a valley a few weeks out of synch,
but it did predict a bumpy year.

2010 Historical Forecast

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This is the Dow industrials on the daily scale in 2010.

The prediction was off this year. The drop predicted to start in September and bottom in October
never appeared.

2009 Historical Forecast

This is the Dow industrials on the daily scale in 2009.

Although the prediction ended the year very close to the actual, it missed the large decline in March.

2008 Historical Forecast

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This is the Dow industrials on the daily scale in 2008.

This was another year that the index and the prediction missed each other. The Dow dropped even
as the prediction said it would rise. If you invert the prediction, it would have been closer to reality.

-- Thomas Bulkowski

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer:
You alone are responsible for your investment decisions. See Privacy/Disclaimer for more
information. Some pattern names are the registered trademarks of their respective owners. A closed
mouth gathers no foot.

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