Dow Crash - Second Leg?

PART 1: THE DOW

The DJIA has risen in what appears to be 5 waves off of the March 2009 bottom. At this time it has formed a head and shoulders top with price having broken down below the left shoulder. With the massive backdrop of deflation still present, the economy continues to deteriorate. Many market analysts are calling for the current head and shoulders break-down to be the start of a second leg down in the Dow that will fall much farther below the low of March, 2009.

To view our March 25, 2009 discussion of the Dow bottom and "price" versus "value", click on the link, below.

www.gold-eagle.com/editorials_08/goldrunner032509.html

So, will the Dow fall in a second leg below the lows of March, 2009? I don't think so as I discussed in the editorial linked, above. I believe the Dow bottomed in March of 2009 for the long-term. Will the Dow far much from here? As the Mogambo Guru often says, "I dunno." We do have a head and shoulders break-down on the Dow chart. Yet, there is a fractal sequence earlier in the chart that may play out, especially since we have reached the point of Global Competitive Currency Devaluations. Let's take a look at the Dow charts.

The first chart of the Dow is the weekly chart of the Dow, today. The Dow has formed what appears to be a very important head and shoulders top, with a subsequent break-down in price already in effect off of the left shoulder. This chart is a weekly Dow chart with moving average ribbons. We can see that the Dow topped recently at the top roll of the MA ribbon configuration. The weekly RSI has broken to new lows for the move, the MACD has busted below the zero line, and the Stochastics has bounced off the 20 mark but is heading lower, again. "Price" has busted down off the left shoulder so things are looking grim, no?

Is it really grim? We must remember that we are in an environment of Dollar Inflation/ Dollar Devaluation. Is it possible that the Dow move up to recent highs was just the first leg up of a Dow climb to re-test the old highs like we saw in the 1970's Dollar Inflation environment? Let's drop one notch lower in Elliott Wave Degree to look at the first potential fractal leg up of the five wave advance the Dow has made since its March 2009 bottom. To do so, we will drop down to the daily moving average ribbon chart for the Dow.

In this chart we can see that the Dow ran up in five waves off of the March 2009 bottom to the top of the daily moving average ribbon band. It then formed a very similar head and shoulders top pattern, with a subsequent break down off of the left shoulder- very similar to what we see in the Dow Weekly Chart, today. Into early July, 2009, the RSI broke lower with the break-down from the left shoulder in price, the MACD busted below the zero line, and the Stochastics after bouncing off the 20 mark, turned down again. All of this appears to be almost identical action to the current weekly Dow chart, no?

OK, now let's add 2 months of time to that Daily chart from July of 2009. Oops! What happened to our Dow head and shoulders break-down? It was blown away to the upside in the Mother of all short squeezes. Could it happen, again? Like I said, "I dunno, but I think that history is worth considering." This is especially true since we are in an environment of Dollar inflation when many potential break-downs in items denominated in Dollars can fail as we see in the Dow of July, 2009. The current Dow head and shoulders break-down is real so caution is certainly warranted. I just thought that this fractal comparison was worth sharing.

PART 2: THE US DOLLAR

After looking at the earlier fractal in the Dow chart and discussing Dollar inflation/ devaluation; maybe we can gleam what might happen with the coming price movements in the Dow by looking to the US Dollar Chart. Below, is a daily chart of the US Dollar that I constructed on June 6th. In this chart it looks to me like the US Dollar has failed at the old highs, and has now broken down from its own head and shoulders top. In fact, this top looks similar to the two previous tops on the chart that I have shaded in yellow. If the USD continues to break down on this chart, I'd expect support to come into the Dow. We will just have to wait and see. In the two previous tops, the Dollar fell sharply to around the 82 level. We shouldn't have too long to wait to see. I'd expect some strength early in the week for the Dollar as it re-tests the break off of the left shoulder. If the Dollar falls sharply in "price" could the Dow chart resolve as it did in July of 2009? I think so. Of course, nothing is a given in the markets.

PART 3: $GOLD

There are some analysts stating that they expect Gold to fall sharply in the coming time-frame. The chart below of long-term $Gold is the latest in the series of charts we have been using to follow the progress of the current Gold parabola as a fractal parabolic match to $Gold in the 1970s. This chart was constructed on April 20th of this year, but since it is such a long-term chart, it is still pretty "current." Back in April when I posted this chart on the Gold-Eagle Forum, I had noted that we were getting to a similar spot "near the right edge of the dark node on the chart", circled in the 70's. You can see in the circle on the left of the chart in the 70's rise, that we are nearing a vertical move up in the Gold parabola. The "similar fractal node" of today is circled on the right side of the chart. A few years, ago, I had stated my expectations for this coming vertical phase in the fractal Gold parabola to lift off from around mid-year, 2010, to year-end. We are getting very close in terms of the fractal cycle. As you can see on this chart, in the 70's there was no sharp fall lower in Gold from this juncture. Though we could have a bit lower to go at this point for Gold, I'd expect Gold to be powering ahead sometime within the next 30 to 45 days to sharply higher new all-time highs. I believe the coming rise in Gold will take us to a range of 1,800 to 2,000 into the first quarter of 2011 based on the fractal of the 70's, with the most likely target being to around 1,950. We'll have to see.

I do, now, have a suitable Precious Metals Fractal chart off of the 70's. As you'd expect, the coming sharp rise into the first quarter of 2011 appears as a sharp upward momentum run for the PM shares on the 70's version. There are several different chart patterns evolving with the different sub-sectors of the PM stock charts at this time. Hopefully, we will be able to put those differences to good use as this Historic PM Bull accelerates upward.