More Crash Potential this Week

We wrote last week of the high potential for a crash on Wall Street, basing our argument on the confluence of cyclical and geo-harmonic patterns that were to have occurred during the week. While last week we did see some significant price erosion on the broad indices, out projected "crash" did not occur. This week, however, holds an even greater potential for a crashing market (though we do not expect it to be the "big one"), and based on technical considerations we must hold such a possibility in close regard throughout the coming week.

To begin with, we consider a mini-crash as an acute possibility based on our technical and Elliott Wave analysis. The past week has seen a period of wildly volatile consoldiation which, in the charts, traces out a net sideways pattern, though an abbreviated one. Nevertheless, a sideways consolidation move under technical analysis is considered to be a precursor for a large, sharp move in the direction of the prevailing trend (in this case, downward). Thus, we should expect a sharp break to the downside once this latest consolidation phase finds resolution. Based on Elliott Wave analysis, next week is as likely a time as ever for this expected downward move. The entire move last week—from the record-breaking one-day upward move of nearly 400 points on Tuesday to the equally profound downward move on Thursday—could be classified as an "a-b-c' corrective pattern that has achieved its upside target and in the process worked off near-term over-sold conditions. So the set up, from an Elliott Wave perspective, is perfect for a major down move next week.

Since next week's expected down trend will be impulsive (as opposed to corrective), we can expect to see sharp, quick downward acceleration accompanied by heavy trading volume. Providing confirmation for our bearish scenario, volume on the NYSE has been especially heavy on those days in which the market has been down—a Dow Theory confirmation that the trend is definitely down. Though we can offer no specific downside price targets for the Dow Jones Industrials or the other indexes, we suspect our Gann swing chart support level of DJ 6975 (as provided in a recent issue of Leading Indicators by trader Robert Krausz) will be met, if not penetrated. Remember, in a crash (mini or full-blown) support levels mean nothing and can be penetrated with the ease of a bullet passing through a sheet of paper. On balance, look for a drop of at least 600-800 points in the DJI before the week ends. Short sellers, you know what to do.

From a Fibonacci perspective, one day in particular to keep an eye on is Monday, Sept. 14. This day is exactly a Fibonacci 55 days from the orthodox top in the Dow of July 21. Cycle analyst Steve Puetz, editor of The Steve Puetz Letter, points out that stock market crashes throughout recorded history typically (though not always) occur approximately 55 days or so from the market peak. So from that point of view, we should definitely be observant of any day next week as a possible crash day.

The DJI futures index (basis September) provides yet more confirmation for our bearish outlook. Last week's chart in the Dow futures registered what we interpret to be a bearish "Harami" pattern under Japanese candlestick analysis. This pattern generally portends price weakness in the very near term (three-to-ten days). Other technical indicators also give us reason to expect continued bearishness in the week ahead. The 5-day average of the CBOE put/call ratio registered a high, but not bullishly high, .91 for the week ended Sept. 11. Equity call volume on the exchange generally exceeded equity put volume by a ratio of two-to-one—a bearish indicator. The four-day average of the Arms index provided a bearish reading of 1.045. The percentage of bullish advisors (as measured by Market Vane) continues to exceed the percentage of bearish advisors, also a bearish contrary indicator. And of course, the major indices continue to trend below their 200-day moving average, a very bearish indicator.

We noted last week that the Japanese Nikkei 225 index had by no means registered a bottom and instead would experience one last serious move to new lows before Japan finally ends its eight year bear market. Our expectations were not disappointed as Friday (Sept. 11) saw a loss of nearly 800 points on the Nikkei, taking the index once again below the critical 14000 benchmark. This time, we see no 1,000-point jumps on the immediate horizon, and we fully expect to see the Nikkei plummet from this point onward. Before it is over, Japan will have to feel the pain of depression before it can pick up the pieces and begin building anew. Short sellers should prepare to take advantage of this great profit-making opportunity.

Speaking of short selling, we note with interest that the latest round of the Wall Street Journal's stock picking contest saw three out of the four "experts" experience significant losses in their "picks." In fact, they were almost beaten by the dark board this time. Ordinarily, most of the contestants manage to pick a few winning stocks as almost all of them are on the "long" side. In the past few years, with stock markets rising, this was not a difficult task. But now, with the bear market making its presence known in an assertive fashion, most Wall Street professionals are having a difficult time finding winners. It seems the day of the easy buy recommendations are over. This month's big winner was a short seller who saw a 25 percent return on his recommended "short" of Pegasystems. If the common wisdom during the bullmarket was "go long," then the new paradigm in the emerging bear market is now "sell short." For those of you unacquainted with the virtues (not to mention the tremendous profit-making potential) of short selling, we urge you to pick up a copy of the book, The Art of Short Selling, by Kathryn F. Staley, available from your local bookstore or from www.amazon.com.

From a socio-cultural perspective, we observed last week that home run king Mark McGuire of the St. Louis Cardinals finally broke the long-standing home run record of Roger Marris. On the day this extraordinary athletic feat was splashed on the front covers of newspapers around the country, Tuesday, the Dow Jones Industrials also made history by experiencing the greatest one-day point gain ever (nearly 400 points). The very next day, news of possible impeachment proceedings against President Clinton were announced and the Dow fell over 300 points on an intraday basis.

Two bull market icons heading in opposite directions. And that great barometer of mass psychology—the Dow Jones Industrial Average—nearly "broke the glass" in measuring both events. To the discerning eye, these events were by no means arbitrary or coincidental. The Dow is inextricably linked to the hopes and fears of the masses, and we should expect more negative signals from this barometer in the days and weeks ahead as national and global events worsen in lock step with the impulses of investor psychology.