Crash Potential High this Week

The bear market has unfolded almost exactly to our parameters over the past couple of weeks. We are now fully convinced—from a technical perspective—that the trend is indeed bearish with the bull all but dead. Any upward momentum from this point forward should be construed only as a temporary rally, or bear market "correction."

Moreover, we are aware of the high potential for a market crash—or at least a severe drop of the stock market—during the week of September 7. This forecast is based on technical analysis as well as cycle work. It appears that several significant cycles are due to turn over during this week, and this harmonic convergence of economic, political and even astronomical cycles carries with it a very strong probability of psychological turmoil that could very well carry over into the market (the chief barometer of mass psychology) and roil investors into panic selling.

For example, Steve Hochberg, editor of the highly-recommended Elliott Wave Theorist Short Term Update [www.elliottwave.com] recently pointed out that, based on the cycle work of Steve Puetz, that next week marks a period in which the potential for a unique phenomenon exists. Puetz has discovered that eight of the largest market panics in history occurred six days before to three days following, a full moon that occurs within six weeks of a solar eclipse. The next full moon is Sunday, September 6 - with the last solar eclipse occurring during August 21-22. This unusual astronomical phenomenon sets up the parameters for Puetz' crash theory to take place. That would put this week (September 7-September 11) in the time frame of a possible (probable?) crash scenario. Only time will tell.

Another factor to keep in mind is the Fibonacci significance of not only next week, but of the entire month of September, as the 34-day and 55-day cycles from the Dow's July 20 top occur during this month. These numbers hold great significance in the market and may yet provide further evidence of a crash near at hand.

From a purely technical perspective, next week still holds the possibility for severe downside momentum, though that cannot be guaranteed.

The Dow Jones Industrials spent much time in a back-and-fill pattern during Thursday and Friday (September 3-4), and this formed what is known as a "spring" or a "line" in technical parlance. These patterns tend to foretell strong breakouts to either the upside or the downside. In the interest of caution, however, we must be prepared for an upthrust to higher prices that would, while correcting near-term oversold conditions, set up an even greater decline in the days/weeks ahead.

The Dow Jones Transportation index has been all but crashing of late, and this provides Dow Theory confirmation of more serious erosion in the Dow Jones Industrials. Even the Dow Jones Utilities, normally a defensive sector, has been experiencing a recent bout of decline—further confirmation of the severity of the bear market at hand (and to come). Volume on the NYSE has thus far been highest on those days when the market was falling—yet another Dow Theory confirmation that a bear is underway.

The advance/decline ratio is still crashing and serves as added warning of the rough times ahead.

From an Elliott Wave perspective, wave five down has still not been completed—when it begins, we should see prices carried down to around DJ 7000, perhaps even to our Gann support level of DJ 6975 identified by Robert Krausz in our last week's commentary. Once that move is completed, look for an upward "a-b-c" correction that could well carry the Dow into the low 8000 territory. Once that move is complete, the falling trend should recommence with new lows being made along the way.

Another crash potential this next week and throughout the month of September is Japan's Nikkei index. Two critical support levels have been broken in recent weeks (15000 and 14000) and a solid break below 14000 would be extremely bearish of Japan's market and economy and would probably harbinger a serious depression for that country. Heretofore, Japan has managed to survive since its market crashed in 1989 with only an extended recession underway; the country has not come close to approaching a severe economic downturn. Japan gets away with this by "spreading the troubles around" so that the entire country is dragged down to a certain level, but in so doing avoids a serious economic setback.

Until Japan is made to feel real pain, however, and until all its bad debts are washed out, its long-standing economic recession cannot said to be complete. Its stock market has not found a bottom yet. We remain convinced that at least one more move to new lows in the Nikkei remains to come.