A Crash, but Not Yet

The Dow Industrials staged a rebound last week on a surge of upside trading volume that reversed the downward trend that had been in place for over two months, and provided at least a temporary buy signal. Despite the massive one-day drop (nearly 400 Dow points) on Tuesday (which we believe was nothing more than an engineered shake-out designed at scaring uncommitted longs out of their positions), several crucial supports remain intact in all major indices. Yes, the crash is coming, but not until later this Fall (more on that later).

Our number one piece of evidence for our assertion that the bull trend is still the dominant force is the daily bar chart of the NYSE Composite Index (see chart). We prefer to use this index for technical analysis because it has historically been the most accurate barometer for measuring the mass psychology on Wall Street, much more so than the Dow and NASDAQ. Note the convergence of two large parabolas—the basis of the cycle. Whenever two parabolic cycles, one upward and another downward, cross paths there is almost always a massive breakout in one direction or the other which typically carries onward for some time. In this case, one can already see the formerly prevailing downward dome was penetrated by an underlying upward cycle. By tracing out the curves of this parabola, using the extreme intraday bottoms of the bars as a guide, one can see the upward cycle has already effectively retained prices from crashing beneath critical support. The price line of the NYSE Composite is now well above its crash low of 572. The two-day bar pattern in this chart is forecasting a further rise in the days ahead. (We credit the discovery of the foundations remarkable and highly accurate form of technical analysis, which we call "Parabolic Analysis," to the great P.Q. Wall, editor of P.Q. Wall Forecast.)

Nevertheless, this remains a challenging market to trade, replete with massive one-day whipsaws and quick rebounds. The NASDAQ Composite seems determined to touch the 5000 level before taking its first significant correction in several months, and is less than a hundred points away from this goal. Advancing volume on the NASDAQ has been absolutely relentless for the past four-to-five months with nary a bump along the way. We have often stated that every great bull market is fueled by strong upside volume, but at this point we must ask whether this is nothing more than "blow-off" volume, which typically precedes major downturns.

In the classic book, The Great Boom and Panic, which described in detail the trading environment on Wall Street before, during and after the Crash of 1929, it was emphasized that in the weeks leading up to the Great Crash, upside volume was relentless, just as it is now (on the NASDAQ). In fact, there was tremendous buying interest among the investing public even during the initial post-crash rally several days after the crash. The lesson learned is that upside volume—even strong upside volume—means little when the overall cycle is against the market. All told, the cycle for the NASDAQ remains up for now, but will gradually begin turning over as we head into summer. It will follow the Dow in its 1929-esque crash this Fall.

Now, to address our views on this coming crash—something that we have been promising Gold-Eagle readers for several months now. Our assertion is based on the Kondratief Wave Theory (K-Wave), which postulates the existence of a 56-to-64-year cycle for everything from interest rates to stock and commodity prices to real estate prices. This theory has been greatly embellished by cycle analyst P.Q. Wall, who has discovered a now proven major cycle aptly named the "Wall Cycle." The Wall Cycle—one of the most important cycles in the stock market—is approximately 20 weeks in duration (3-to-4-month-type) and tends to bottom with uncanny regularity. There are nine Wall Cycles in each 3-to-4-year Kitchin Cycle (a further subdivision of the K-Wave). What makes the Wall Cycle so mystical is the fact that it is derived by dividing the number 144 into the K-Wave cycle. Of course, the number 144 is of paramount importance in mathematics, Fibonacci relationships, astronomy, and biblical theology. Wall Cycle 8 (of 9) began last week and is sure to continue upward until approximately sometime in May. It will then begin its descending phase into July, and from there launch the grand finale Wall Cycle 9—the prelude to the Great Crash of 2000. Dare we make such bold assertions about a future that we have only vague comprehension about? Absolutely, for the Wall Cycle is as inviolate as the Law of Gravity itself, and when combined with the magnificent forces of the over-arching K-Wave, the Kitchin Wave and a multiplicity of other cycles due to top at the same approximate time, the results will be nothing less than catastrophic.

The Dow Industrials, as we mentioned above, bounced back by over 500 points from its low of late February and should be above the psychologically important 10,000 level by next week. Advancing volume on the NYSE has been very strong over the past five days and punctured a bearish dome on our 5-day advancing volume chart (see chart). In fact, we have never seen anything like this before—a straight-up advance with no warning at all to break out of the downward trend of declining volume. This almost seems like desperation buying by some interested faction(s) in order to keep the market from collapsing. Everyone knows that the Dow is in danger when below 10,000, and this is precisely when the incredible upsurge in advancing volume occurred. Maybe there really is a "Plunge Protection Team." Nevertheless, the underlying cycle in the 5-day advancing volume chart is upward, and the Dow will likely continue higher throughout the remainder of the month and well into next month.

We wrote recently that 2345 was the important level to watch in the Dow Transportation index since it represents the closing low—and therefore critical support—of the 1998 market slide (the intraday low in the Transports in October 1998 was 2223, which also should be considered a support level). Sure enough, the Transports, after coming within five points of this level, promptly reversed course and now stand a hundred points or so above it. This is yet another indication that buying interests have once again come to the rescue to save the market from certain doom. Traders occasionally will "test" these critical support levels to see if buying interest picks up to support the market (hence the term "support). If it does, they will back away from their selling activities and commence buying once again. This appears to have been their pattern this time around.

Another sign that the trend may not be ready to turn down yet is the fact that the Russell 2000 index of small-cap stocks is still in a bullish phase. The chart for the Russell 2000 looks strong, and even on days in the past two weeks when the Dow and NASDAQ have been down, the Russell has held its own. This is a sign of strength since the Russell represents a broader cross-section of stocks in the overall market than the two major indices. The Russell may be telling us that there is still some time left in this bull market before the trend changes.

The outlook for interest rates is positive in the short term and should be supportive of a continued upward move in the interest-sensitive NYSE stocks in the weeks ahead. The Dow Jones Bond index, a proxy for interest rates, is bottoming out in bullish fashion, as is the corresponding advance/decline line for corporate bonds. The yield on the 30-year T-bond itself has broken below a supporting trendline and is poised for a further decline. All told, Spring should be bullish for bonds.

The outlook for precious metals is very intriguing, and there is indeed profit potential aplenty. We won't touch on it here because it would take a separate commentary and analysis to address all the points we would make. We'll save that for this weekend, when you can check out our latest metals outlook here at GOLD-EAGLE.

The overseas markets still look strong, particularly Japan, Hong Kong, China and Russia, as well as certain South American and European indexes. However, the Asian Pacific stock exchanges look like they are topping out just as they did in the spring of 1997, which led to the Asian financial crisis of late '97 and '98. It looks like there could be a repeat of the "Asian Contagion" in 2000.

Merger mania continue to permeate the business world and not even the stock exchanges themselves are immune from the bug to be bigger through merging. A proposed NYSE/NASDAQ merger has been discussed in recent days, although it is highly doubtful such a merger will ever be taking place. If it did you can rest assured it would be the crowning event of the 18-year bull market. Now it appears that even the CFTC, which governs commodities, wants to jump aboard the equities bandwagon. Discussions between SEC and CFTC are ongoing which seek to list individual stocks on the commodities exchanges as tradable futures (as if options on stocks weren't enough!). The money game continues its spiral ever upward and anon.

The trading environment remains very selective, and we advise extreme caution in timing your commitments. This definitely is a trader's market, so be on your toes. But the overall trend argues for higher prices throughout the better part of this Spring, so be prepared to take advantage of the excellent buying opportunities that are sure to come.