Bear Still Growling but Bulls Still Kicking

Bears were rewarded last week on Wall Street as a significant and long-standing technical development finally culminated with share prices falling hard towards the end of last week.

The technical development we speak of is the ascending wedge formation we have followed in the charts for the past three weeks—prices finally broke decisively out of the wedge upon reaching the apex and fell several hundred points before mounting an impressive rally on Friday, Oct. 2. Interestingly, the just-broken ascending wedge pattern had formed within a larger contracting triangle pattern (see chart)—both bearish patterns auguring further price declines in the days/weeks ahead.

However, we must be alert for sharp, sudden price spikes upward along the way as the market continually descends throughout the month of October as surely the Dow's demise will be punctuated with intermittent rallies of today's (Oct. 2) ilk. We can know with a fair amount of certainty, however, that today's rally was not the beginning of a new trend; rather, it was merely a counter-trend rally, known as a bear market "correction." Next Monday (Oct. 5) may see a follow-through rally, and in fact this is anticipated based on our analysis of the S&P 500 futures chart (basis December). The Japanese candlestick pattern in that chart, which also broke out of a bearish ascending wedge last week, formed a bullish "harami" pattern on Friday which probably points to a continuation of this rally into early next week, at the very least. More declines, however, are in store thereafter.

Interestingly, the NASDAQ index finished the trading day of Oct. 2 only marginally higher, unlike the Dow and S&P, which posted a strong trading day. This underlying weakness in OTC stocks is a harbinger for a strong collapse in the very near future. Investors who want to profit from this expected collapse, we recommend the Rydex Arktos Fund, which is inversely correlated to NASDAQ. Over the next month or so, we expect this fund to one of the highest-performing mutual funds.

Technical indicators continue to confirm the entrenched bear market's dominance. Call volume continues to exceed put volume on the CBOE by a significant amount; the major indices continue to trade below their 200-day moving averages; market advisory sentiment is still predominantly bullish; and the ratio of mutual fund share purchases to redemptions is still low—all bearish indicators.

The Dow Jones Transportation index continues to confirm the Dow Industrials' decline and is pointing to more decline ahead. The Transports registered a chart pattern known as a "tweezers top" last week on the candlestick chart, and this should mean lower prices on the immediate horizon. Utilities have benefited from the strong performance in the interest rate market of late accompanied by "flight-to-quality" mentality among investors seeking shelter from the worldwide economic fallout. This trend toward higher Utilities prices, however, cannot be expected to last much longer, and this index should collapse right along with the other major indices.

The month of October is historically a bearish one for the stock market, and we expect this one to be no different. Fortunately, there exist a number of safe alternatives for preserving capital and even making profits while the world's equity market plummet. Short selling individual securities, buying shares in bear market mutual funds, buying put options on stock market index futures, or buying gold call options are just some of the many opportunities investors have in these financially dangerous times.