The Dow Jones saw its latest correction bottom on March 23rd declining to -11.58% in the BEV chart below. Since then the Dow Jones has oscillated from just below -10% and up to the -8% BEV levels as bulls and bears alike wait to see what is coming their way.  

So what’s next for the Dow Jones?  Well, my thinking is the Dow Jones saw its last all-time high on January 26, and in the three months that followed its BEV plot has developed a pattern of lower highs and lower lows.  

That’s not a bullish chart pattern we see below, and won’t be until it breaks above the -3.41% seen on February 26th (Red Circle). A five percent move from today’s closing would be all it would take to cheer the bulls by reversing this bearish chart pattern, but will the Dow Jones do that? If the bull market still lives, it will do that and more. However, if the Dow Jones next move is to break below that -11.58% seen on March 23rd, I’m going to stop even considering the Bull case in this market.

What’s bothering me isn’t the possibility of seeing the Dow Jones correct down to even the -20% BEV level. That happens in bull markets. But the current advance began in March 2009, advancing 20,000 points as of January of this year. Nine years is a long time for the stock market to advance without seeing a significant correction.The largest correction so far was a 16% decline in 2011, so we’re due for a major retrenchment in market valuations.

The thing that nags me the most is seen in the chart below. The Dow Jones (my proxy for the broad stock market) is grossly overvalued, and has been for years if not decades. Just looking at the chart below, selling today and keeping away until the Dow Jones breaks below its 5,000 level isn’t unreasonable, however long, how many years that may take.

As seen in the table below, a Dow Jones decline to its 5000 level would be a decline of over 80%; a Great Depression event. Before the coming bear market exhausts itself, I’m concerned its ultimate bottom may even surpass that of the depressing 1930’s: an 89.19% decline in the Dow Jones.  We’ll call that the -90% row, or deeper in the table below.

But that doesn’t mean the stock market is drawing near its point of panic that ultimately develops in every bear market; though it could. In 1929 the Dow Jones peaked on September 3rd, and then the dreaded 2% days (days of extreme volatility) began piling up. By trading day forty after the top, the Dow Jones broke below its BEV -15% line. Eight days later “Black Tuesday” happened. As the Dow Jones came within a hair of breaking below its BEV -40% line, former millionaires were jumping out of windows overlooking Wall Street; all this only forty-eight trading days after the Dow Jones’ bull market top of September 1929.

The second deepest bear market was our sub-prime bear market. From a bull market peak on October 9th 2007, the Dow Jones didn’t break below its -15% level until trading day 71 (22 Jan 2008), but recovered after by recouping half of its losses. It wasn’t until July 2008 that the Dow Jones broke below its -20% BEV level, nine months and 184 trading days after the top. But the bulls didn’t begin to stampede in panic until October 2008. A full year after the Dow Jones saw its last all-time high, it finally broke below its BEV -40% line.

Currently we’re at trading day 53 after the Dow Jones’ last all-time high, closing the week only -8.48% below its last all-time high. I’m thinking we’re in a bear market, but it may be a while before we begin seeing the bulls begin to sweat.

Here is something to take note of: “market experts” are beginning to notice the market’s increasing volatility. I saw this last week on Drudge, nothing has changed since then:

‘I have never seen a market this volatile to this extent in my career. Now that’s only 66 years, so I shouldn’t make too much about it, but you’re right: I’ve seen two 50-percent declines, I’ve seen a 25-percent decline in one day and I’ve never seen anything like this before.’

– Jack Bogle, Vanguard Group founder and retired CEO