Summary of Index Daily Closings for Week Ending Apr 30, 2004
|Date||DJIA||Transports||S&P||NASDAQ||Jun 30 Yr Treas |
|SHORT TERM FORECAST |
(Next Two Weeks)
|Market Rise||Medium||Very High||80%|
|Very Low Under||20%|
|INTERMEDIATE TERM FORECAST |
(Next 12 Weeks)
|TREND||PROBABILITY||Substantial||800 points+ (DJIA)|
|Substantial Rise||Low||Market Move||200 to 800 points (DJIA)|
|Market Rise||Medium||Sideways||Up or Down 200 (DJIA)|
|Substantial Decline||Very High|
The Dow Jones Industrial Average truncated its Elliott Wave "c of 2 Up" pattern, falling short of the .786 retracement target (10,593) that the Transports hit, and fell 247.27 points to close the week at 10,225.57. This decline dropped below the key 10,250 support level on a closing basis and therefore confirms that the expected deep decline Wave 3 is now underway. We do not know if this is the start of the expected crash, or whether that event awaits another day. However, the technical landscape is conducive to a substantial decline at any time - perhaps one that could be defined as a crash. No guarantees of course as there is the Plunge Protection Team and the M-3 spigot on ready call to delay or mitigate the damage. Our job in this newsletter is to alert you to probabilities. Probabilities are not certainties.
We remain under a Dow Theory "sell" signal, the S&P to VIX ratio is a Bearish 66.34 (over 70 is bad), and there are topping patterns all over the place. Quadruple Tops in the Russell 2000 and Wilshire 5000, a Double Top in the Morgan Stanley Consumer Index, Rounded Tops in the DJIA, the S&P 500, and AMEX Composite, and Bearish Head & Shoulders in the NASDAQ Composite and NASDAQ 100, the Semiconductor Sector, the Dow Transports, and the PHLX Gold & Silver Index ($XAU). Insiders are dumping and there is evidence that selling is becoming broad-based.
|Equities Markets Technical Indicator Index (TII) ™|
|Week Ended||Short Term Index||Intermediate Term Index|
|Dec 19, 2003||(6.50)||(47.03)||Scale|
|Jan 2, 2004||(48.17)||(40.33)|
|Jan 9, 2004||(96.50)||(39.28)||(100) to +100|
|Jan 16, 2004||(20.00)||(40.65)|
|Jan 23, 2004||(8.13)||(32.15)||Negative (Bearish)|
|Jan 30, 2004||2.81||(25.98)||Positive (Bullish)|
|Feb 6, 2004||11.75||(20.19)|
|Feb 13, 2004||(68.25)||(22.19)|
|Feb 20, 2004||(30.00)||(22.36)|
|Feb 27, 2004||(31.00)||(20.17)|
|Mar 5, 2004||16.00||(17.17)|
|Mar 12, 2004||( 9.00)||(14.70)|
|Mar 19, 2004||(12.00)||(27.60)|
|Mar 26, 2004||73.00||(38.35)|
|Apr 2, 2004||(3.00)||(35.61)|
|Apr 16, 2004||(43.00)||(29.90)|
|Apr 23, 2004||94.00||(22.69)|
|Apr 30, 2004||(33.25)||(34.88)|
This week the Short-term Technical Indicator Index comes in at negative (33.25), perhaps the beginning of a significant multi-month decline. This indicator is a useful predictor of equity market moves over the next two weeks, both as to direction and to a lesser extent strength of move. For example, readings near zero indicate narrow sideways moves are probable. Readings closer to +/-100 indicate with a higher degree of confidence that an impulsive move up or down is likely over the short run. Market conditions can change on a dime, so it may be unwise to trade off this weekly measured indicator.
The Intermediate-term Technical Indicator Index is useful for monitoring what's over the horizon - over the next twelve weeks. It serves as an early warning system for unforeseen trend changes of considerable magnitude. This week the Intermediate-term TII comes in at negative (34.88), warning that a significant reversal remains at risk over the next three months. Massive increases in M-3 may mitigate the damage or the timing.
On Friday, the Dow Jones Industrial Average broke below April 21st's closing low, confirming that it has joined the Transports in completing its Elliott Wave "2 up of 3 down" pattern. This pattern included a truncated wave "c up of 2 up," meaning it did not establish a new high above April 7th's wave "a" 10,570 high. It should have. Wave "c" failures indicate strength in the opposite direction - in this case down (Mastering Elliott Wave, by Glenn Neely, p. 12-26, Windsor Books, 1990). This shortened top in minute wave 2 up also failed to confirm the Transportation average's new high, when the Trannies' wave "c" up of 2 up exceeded its wave "a" up. This is the reason why our Short-term TII reading failed this past week. Our Short-term TII was projecting a normal wave "c" of 2 up completion top above it's "a" wave, but the DJIA's failure to beat 10,570 creates another significant Bearish divergence between the price action of the Dow Transports versus the Dow Industrials. The charts on page 3 show this divergence along with the Elliott Wave counts. What's this all mean? Stocks are headed down . . . down, down, down. Oh, there may be the stair-step "up" between "down" steps, but the net effect should be a significant decline. Welcome to the world of Elliott Wave 3 of 3 of 3.
This analysis is worth repeating this week: we are close to the edge. Are we headed for a stock market crash? If we define a stock market crash as a decline of over 1300 points within a 48 trading day time period - using closing prices - then, the above chart indicates the answer is unequivocally yes. Every single time the DJIA hit a market top since the grand Bull market top on 1/14/00, a crash occurred starting within 17 to 67 trading days of each top. Here's how it shakes out:
Crash # 1 in the chart started 17 trading days after the DJIA's final peak of a quadruple topping pattern. The top was 2/12/01 and the crash began 3/8/01. Between those two dates the market bounced around, descended at a gentle slope, spiked up to a lower top, then plummeted 1,469 points (13.5%) in just 10 trading days. If you only watched price action, you'd never have known this kind of decline was coming.
Crash # 2 above started 67 trading days from another top at 11,232 on 5/21/01. Prices drifted lower, then spiked up to the delight of perma-bulls, until on 8/24/01 the market crashed 2,187 points (20.9%) over the next 15 trading days. Pre 9/11, the crash had already wiped out 818 of those points.
Crash # 3 began 39 trading days from the market top of 3/19/02, declining from 10,298 on 5/14/02 to 7,702 on 7/23/02 - a 2,596 point (25.2%) wipeout over 48 trading days.
Crash # 4 occurred 12 trading days from the 8/22/02 high, and fell 1,316 points (15.3%) from 9/10/02 to 10/9/02, a 21 trading day event.
Crash # 5 started 31 trading days from its top, lasted 38 trading days, and fell 1318 points (14.9%).
The HUI - the silver and gold mining stocks - have CRASHED!!! And it may not be finished crashing yet. While the RSI Indicator is showing an oversold condition, the MACD is not yet showing signs of turning back up. And Lord help us, what if general equities crash? You have to believe there will be more downside affect on these mining stocks.
Check out the 2 percent Bollinger bands (blue lines 2% above and below the HUI 21 day moving average) during this event. Prices are riding the bottom band almost straight down. Ever wonder what a crash looks like? Here it is. Amazing.
This index is down 31.2 percent since its Bearish Double Top in December and January. The crash portion of this ugly decline is down 25.8 percent over the past 18 trading days, primarily the month of April. I doubt you'll see the Plunge Protection Team rush to this index's aid.
You may be looking at a preview of crashes to come throughout all major indices around the globe. It sneaks up on us, doesn't it?
Pretty good news flying in the face of an ugly equity market performance. This validates the technical theory contention that news does not cause markets to move, but rather markets discount the future, ignoring today's news. Markets have a language, and primarily their price movements communicate to us where they are headed next.
The Chicago Purchasing Managers' Index rose to 63.9 from 57.6 in March, according to a report on www.CNNMoney.com Friday. Readings above 50 indicate growth.
The Commerce Department told us that Personal Spending and Personal Income were both up 0.4 percent in March. Excluding inflation, these figures were up only 0.1 percent. We learned this week from Redbook, an independent research company, that U.S. Chain Store Sales fell 2.3 percent in April compared with March.
The government reported this week that 1st Quarter 2004 GDP grew at a 4.2% clip. This compares to a 4.1% pace for the 4th quarter 2003. Fueling this strong first quarter was National Defense spending, up a huge 15.1 percent versus only 3 percent last quarter. Excluding military spending, GDP growth would be in the 3.5 percent ballpark.
Existing Home Sales rose 5.7 percent in March, according to the National Association of Realtors. Interest rates didn't really begin to rise dramatically until April. So it will be interesting to see April's number. One hint: Refinancings fell 5.8 percent during the week of April 23rd, according to the Mortgage Bankers Association. The rise in long-term rates obviously took its toll. 30 Year Mortgages are now over 6.00 percent.
The Labor Department reported that Initial Jobless Claims were 338,000 in the week ended April 24th. Of course, they revised last week's figure up to 356,000. The number of good folks collecting government checks rose to 3.013 million.
The Conference Board reported that its survey of U.S. Households revealed that Consumer Confidence in April was 92.9, up from 88.5 in March. Guess those lifeguard, stable cleaning, camp counselor, and landscaping jobs really did the trick.
Next Tuesday, the Federal Reserve meets to decide the fate of interest rates. What will they do? If the economic numbers we've been fed the past six months are remotely accurate, they should bump the Fed Funds target rate to at the very least 1.25%. If they don't believe the numbers, or are half as bothered by the technical landscape as I and several other technical market analysts are, then they'll hold rates at 1.0% - 46 year lows. Don't ya just wish you were a dust mite on the Oval Office carpet listening in on Dubya's pre-FOMC telephone chat with the venerable Fed Chairman? If they had a face to face, do ya think he'd be sticking his pointer finger in the old man's chest? "Now listen here, Al, this is an election year, and ya got my father tossed after one term a decade ago; now yer not gonna do that again, are ya ol' man? ARE ya ol' man? Repeat after me. Stocks go up, real estate goes up. Stocks go up, real estate goes up." Dick enters the room. "All together now, stocks . . . Does anyone know where Maria is? She knows this mantra."
Money Supply, the Dollar & Gold:
Let's start with Gold, the metal. The above chart (courtesy of www.stockcharts.com) shows Gold is at a make-or-break crossroads for the short, and perhaps intermediate-term horizon. In spite of the recent 12 percent decline, Gold remains inside its long-term rising trend-channel. While it is approaching the bottom line of this trend-channel, the RSI is telling us Gold may be oversold and due for an upward move. The MACD is also at a deep negative reading normally associated with the start of rallies. However, it recently declined 1.5 percent below its 200 day moving average. Not enough to declare it a decisive breakdown, but close. There is also a textbook Bearish double top in the metal. So, will Gold break to the upside or break below the lower trend-line and head south? My read on this is that if the general equity markets crash, Gold could initially (perhaps for several months) get caught in the downdraft, as the deflationary impact of such an event would push commodities lower. However, Gold has intrinsic monetary value, and should currencies collapse during the Central Banks' attempt to save markets with monstrous infusions of fiat money, Gold should quickly reverse course to the upside. Should one nation decide to back its paper with Gold, well, the sky is the limit for the precious metal at that point.
M-3 rose only 2.9 billion in the latest week, which is essentially flat. If a major equity event is going to be delayed, M-3 will have to grow faster than that. After growing at an 11 percent annualized rate during the first quarter 2004, during April it is up only 9.6 billion, a 1.27% annualized rate of growth - insufficient to stop a coming equity market crash.
The U.S. trade-weighted Dollar is the proverbial canary in the mineshaft. Keep your eye on the dollar. If, in the face of the quarter trillion liquidity infusion the Fed permitted during the first 3 months of 2004, the Dollar rises, it portends asset value deterioration - deflation. If the dollar rises as M-3 rises, it means there is coming an extraordinary need for Dollars. How? This could happen if the collateral underlying the Debt bubble must be sold to repay that debt. Should real estate or stocks unexpectedly decline, given the awful employment environment, given the prospect of rising interest rates, there will be a mad rush to obtain dollars, precipitating more asset liquidiations - supply exceeding demand - and a deflationary downward spiral. Should the Dollar resume its decline, it means hyperinflation is temporarily winning, and commodities should rise - including Gold - until worldwide currencies begin to collapse, tripping bond and equity market crashes and ergo, deflation.
Bonds and Interest Rates:
The chart below shows the two year price pattern for the US Long Bond. We see a Draculalook- alike that is an ominous Bearish Head & Shoulders topping pattern (rates should rise much further). However, the Relative Strength Indicator is oversold and now turning up, meaning that first there could be a short-term to intermediate-term rally in Bond prices. The Moving Average Convergence/ Divergence indicator seems to be indicating bonds may be near the bottom and ready to turn up - for a while. Prices are traveling down the bottom 2 percent Bollinger band surrounding the 21 day moving average. Should equities deflate, the US Bond should rally. Should the US Bond deflate more from here, it could aggravate equities into deflating. Massive M-3 stimulation could push Bond prices lower. One possible scenario is that equities decline, Bond prices turn up, Master Planners inject massive amounts of money into the system to rescue stocks, and Bonds tumble.
The Bear is back. This means negative Intermediate-term TII readings may trump Short-term TII positive readings. It means oversold conditions may last longer than expected. It means declines can be longer and deeper than we've seen in a few years. It means we are at high risk of crashes, of asset deflation, of Debt deflation, of general price deflation. Defensive strategies are warranted.
"Now learn from the parable of the fig tree;
when its branch has already become tender and puts forth its
leaves, you know that summer is near; even so, you too, when you
see all these things, recognize that He is near, right at the door.
But be sure of this, that if the head of the house had
known at what time of the night the thief was coming,
he would have been on the alert and would not have allowed
his house to be broken into."
Matthew 24: 32, 33, 43
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|Key Economic Statistics|
|Date||VIX||Mar. U.S. $||Euro||CRB||Gold||Silver||Crude Oil||1 Week Avg. M-3|
Note: VIX, CRB, and Crude are up. Gold and Silver down. Dollar and M-3 flat.
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