Global Market Outlook

Global markets, buoyed by short-term strength from buyers, evinced partial retracements of the declines that have plagued most major stock, bond and currency indices of late. While this latest shot of strength from buyers has provided world markets with an upward bias, we are firmly convinced more declines are on the immediate horizon.

Stocks

Our most heavily watched index, the Dow Jones Industrial Average, has benefited from a three-week bear market "correction" that has given stock prices clear, if tenuous, upward momentum. Despite this upward bias, however, prices on the Dow have fluctuated in a trading range between 7400 and 8000 for several weeks now as the bulls and the bears fight it out in a tug of war. Technically, this volatility has resulted in a chart pattern known as an "ascending wedge," a technical formation that augurs sharp downward movement in the near future. More specifically, we expect the Dow to touch the supply line (overhead resistance) of this ascending wedge pattern (which lies near DJ 8175) by no later than the end of the month—possibly by week's end. This should result in a fast, furious decline to around—or below—the DJ 7000 level. From there, we expect prices to rise in one last-gasp rally in Elliott Wave fashion before falling into its next downward leg. So be prepared for a climb to near the 8175 levels, probably by Thursday (Sept. 24), followed by a fall to the 7,000 level or lower. It is the third leg (intermediate wave three under Elliott Wave analysis), however, that presents the highest potential for a crash on the NYSE. Several prominent stock market analysts, most notably Robert Prechter of Elliott Wave International, are calling for an October crash on Wall Street that could conceivably carry through the better part of the month. It would do traders well to position themselves for this expected collapse. Placing short selling orders for individual securities, entering positions in bear market hedge funds (such as the Prudent Bear Fund), or buying put options on stock index futures would be in order at this time. Traders who are unsure of the market's immediate-term direction should place orders for "straddle" option spreads once the Dow breaks its ascending wedge formation. This strategy involves buying simultaneously a put and a call of the same month and underlying market. Thus, a break of the ascending wedge pattern in the Dow, regardless of whether to the upside or the downside, would produce profitable results as long as the breakout is substantial (as it is sure to be). Still, we favor heavily a break to the downside, so traders confident in our outlook should enter bearish option strategies.

Meanwhile, in Tokyo, the Nikkei 225 index is performing exactly to our expectations. We pointed out last week a prodigious gap formation on the Nikkei's candlestick futures chart which portended another round of collapse in prices. True to form, the Tokyo nose-dived nearly 400 points the following trading session before managing an anemic rally the next day.

Tokyo markets were closed today (Sept. 23) to a public holiday, but the remainder of the trading week could well witness continuation of this collapse.Even if the Nikkei manages to rally the remainder of the week, we still expect further price erosion with a projected downside price target between 10,000-12,000 (or lower) before the index finally bottoms. This price objective should be reached by the end of the year.

The Hong Kong Hang Seng index continues its long downtrend begun last summer and should continue to do so for the rest of 1998. Until the upper downtrend line is penetrated (at approximately 8100) the downtrend remains firmly intact and falling prices should continue to be the norm, punctuated only by occasional upward bounces.

Bonds

The U.S. bond market continues its bullish run with yields on the 30-year U.S. Treasury bond futures index heading towards the 5% mark (with prices currently at 129-29). However, the long-bond's chart has etched out an unmistakable ascending wedge pattern, a technical pattern with clear bearish implications. Moreover, prices are extremely close to the apex of the wedge and could break out to the downside at any time now. Traders should not be long the 30-year T-bond at this time and should consider taking short positions.

In testimony before the U.S. Congress on Sept. 23, Alan Greenspan strongly implied a cut in short-term interest rates was imminent, but this will have absolutely no effect on the overall U.S. equities market or the economy. News of a rate cut, while it may bolster stock or bond prices for a day or so, will inevitably be forgotten by the masses of investors within a few short days and the effects to the markets—whether positive or negative—will wear off quickly. In reality, the markets discount future events well in advance and respond accordingly, so any rate cut that lies ahead has already long since been discounted by the markets. So even if there is a cut in short-term interest rates by the Fed, rest assured this will have no lasting impact on U.S. financial markets.

German bonds have completed, or are nearing completion, of a blow-off topping pattern that should see a rapid reversal of prices in the near future. Prices for the 10-year "Bund" continue to hover around 114, but how long this high level can be held is uncertain. This index has been the recepient of "flight to quality" buying, but clearly a downward correction is near.

The J.P. Morgan Emerging Bond Index, meanwhile, continues to plummet and should continue to do so for the remainder of the year, with intermittent corrections along the way.

Currencies

The U.S. Dollar index isn't "king" anymore. The J.P. Morgan dollar index has fell to 110 last week from its all-time high of 116. While it has traded in a narrow range over the past few days, another bout of decline is likely in the coming weeks. The U.S. dollar futures chart has rallied from recent declines over the past few days, but prices have traded in a narrowing "descending triangle" pattern, a chart formation that points to lower prices in the near term. Prices are nearing the apex of this pattern, so we should expect a downside breakout very soon.

The Japanese Yen is currently trading near the 75 level on the Chicago Mercantile Exchange. The long-term downtrend in this index is also firmly intact with no bottom in sight. Until Japan can muster the strength to effect significant economic reform its currency will continue to reflect the massive lack of confidence in the government by the Japanese people.

Like the Yen, the Canadian dollar is crashing with no bottom in sight. The futures chart for the C-dollar, while it appears to be in an Elliott Wave "a-b-c" upward correction, is still in the midst of a massive downtrend that should continue once the correction ends. This is attributable to the overall deflationary trend in commodities. As Canada's currency is commodity-based, its strength is directly correlated to the strength or weakness of the commodities sector. And there doesn't seem to be much hope for commodities in the near future.

The Mexican Peso is also in a prolonged collapse that is projected to continue over the near term. The chart for the Peso shows that prices recently broke out of a long-term technical formation known as a "rectangle." Prices, after backing and filling in this consolidation phase, have now clearly emerged to the downside and will continue to do so with no reversal in site. Traders should look to short any intermediate rallies that occur in this index.

Energy complex

The Wall Street Journal recently asked rhetorically if the bottom had been seen in crude oil. While oil futures have enjoyed a decent rally of late, the answer to that question is no. As always, we base our forecast on technical analysis, and the candlestick chart for light sweet crude oil shows a well-developed bearish "ascending wedge" pattern that is nearing completion. While we are bullish the oil complex long-term, our short- and intermediate-term outlook remains bearish. Traders should seek to enter short positions on oil futures contracts on corrections.

Precious metals

Gold has shown recent strength that has effectively nullified our near-term bearish argument. However, we still believe gold's intermediate outlook is bearish, with prices heading to the $250/oz. level in the next few months. In order for this forecast to be invalidated, gold must decisively break above $300/oz. in the next few weeks. A break below $280/oz. will confirm our outlook. Gold's long-term chart shows a bearish descending triangle pattern which generally projects lower prices ahead. The next few days should go a long way in either confirming or annulling this forecast. If gold breaks firmly above $300/oz., we will have reason to turn fully bullish over the near-term.