A Mid Year Lookback at the Dow 2011 Forecast

At the beginning/end of every year, I create a couple of forecasts for markets that are key (to me).  The process helps me to conceptually wrap-up the prior year, and move on with my life.  The forecasting method is my own.  While I do use some techniques (VAR, etc.) that can't be deemed as "mine," I use them in my own special way(s).  There is also a discretionary component to the forecasts, as I always reserve the right to totally scrap something that doesn't make any sense. Ex:) A plunge in the DOW to 100 pts. doesn't make any sense, so if I generate a forecast that calls for this...I will make some overriding assumptions/adjustments, and carry on.  I will never put 100% faith and trust in any model or method, Amen.

The point:

I created the pictured forecast in January of this year.  You can tell that the start date of the forecast is not 2011.00, and it is because I created the thing in the first couple of weeks (no point in creating a forecast for days passed, IMHO).  The forecast is of the DOW Jones Industrial Average.  The forecast is NOT of price (obviously), but of a denoised DOW forecast's first difference (DOW momo forecast).

Inherently, the denoising reduces the accuracy of the forecast, as the DOW doesn't move as cleanly as the forecast does (we could only hope to be so lucky).  I doubt that incorporating white/black/brown/pink noise into this forecast would've made it any more accurate than the smoother version.  I don't care for 95% error bounds either, as I'm not interested in peddling ambiguity.  For me, the forecasts push my brain into a binary frame of mind:  1) forecast is working, so follow forecast, or 0) forecast isn't working, so don't follow forecast.  This is so much easier for me to deal with, mentally, so I'll keep doing it.

The forecast has been fairly accurate for the balance of 2011.  Anything above the zero line means the DOW should have a positive trend.  Anything below the zero line means the DOW should have a negative trend.  Of course, you also have to interpret the rising/falling tendency of the forecast.  If the forecast is above the zero line, and it is falling...this means the rally will likely peter out near the threshold cross.  The opposite interpretation holds for attempted bottom ticks.

Lurk away.