Summary of Index Daily Closings for Week Ending August 13, 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)|
This week, with the exception of the Dow Jones Industrial Average which was essentially flat, up only 11 points, nearly all the other averages - large or small - hit new lows for the year on Thursday, in line with last week's Short-term TII reading of negative (38.00) and the Intermediate-term TII negative readings from the past several months. Volume was lower on Tuesday's rally than on Thursday's decline, indicating the pros are unloading stocks to the amateurs. This is topping action.
The number of new lows on the NYSE continue to increase, hitting triple figures late in the week - 127 on Thursday, and 110 on Friday. Significant declines often see upwards of 400 to 500 new 52 week lows on the NYSE at intermediate-term bottoms. Not there yet.
The McClellan Oscillator is not at oversold levels - not even close. The end of the current decline should come after panic selling occurs, probably triggered by some news event. We believe this will likely occur by September 7th, our next key Fibonacci turn date. Likely downside target is in the 9000 +/- area for the Dow Industrials. That should be the end of minor degree wave 1 down of Primary degree 3 down for the Bear Market since 2000. All declines should stair-step, and include short-covering rallies.
|Equities Markets Technical Indicator Index (TII) ™|
|Week Ended||Short Term Index||Intermediate Term Index|
|Apr 16, 2004||(43.00)||(29.90)||Scale|
|Apr 23, 2004||94.00||(22.69)|
|Apr 30, 2004||(33.25)||(34.88)||(100) to +100|
|May 7, 2004||(28.75)||(47.75)|
|May 14, 2004||(25.75)||(66.45)||(Negative) Bearish|
|May 21, 2004||22.00||(67.23)||Positive Bullish|
|May 28, 2004||( 3.50)||(48.48)|
|June 4, 2004||(55.75)||(34.07)|
|June 11, 2004||(77.75)||(25.92)|
|June 18, 2004||(40.25)||(31.17)|
|June 25, 2004||(34.00)||(26.10)|
|July 2, 2004||(41.50)||(27.64)|
|July 9, 2004||(32.50)||(30.21)|
|July 16, 2004||(33.75)||(41.99)|
|July 23, 2004||(59.00)||(49.98)|
|July 30, 2004||46.25||(52.18)|
|Aug 6, 2004||(38.00)||(50.40)|
|Aug 13, 2004||(15.75)||(49.03)|
This week the Short-term Technical Indicator Index comes in at negative (15.75), indicating a market decline is probable. 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, or the Plunge Protection Team can come in and temporarily stop market slides, 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 (49.03).
The next two charts on page 3 update the Analog of the current 2000 to 2004 Bear Market in the DJIA vs: the average of the 1929-1936 and 1968-1975 Secular Bear Markets. The hope here is that if current prices are tracking the past closely, perhaps we can obtain predictive power over the future course of prices. So far the analog is tracking nearly identically. If we incorporate the second chart, a chart of Probable Tops and Bottoms Turn Dates for the DJIA along with this analog, we can lay out a map for upcoming turns. For example, the next Fibonacci turn date based upon a phi ratio number of trading days from 1/14/2000 is due on September 7th, 2004. That would seem to correspond with a temporary bottom in the 1929/1968 Bear Markets pattern. We then see a blip up in the 1929/1968 Bear Market pattern that is quite brief, then a sharp return south in prices. Interestingly, the next Fibonacci turn date after 9/7/04 is also brief, 10/21/04, which could correspond with the next minor wave up's top. Then the 1929/1968 pattern shows a brief but sharp decline, and interestingly, once again, the next Fibonacci turn date 11/16/04 is only 3 weeks beyond the prior one, the 10/21/04 one. The 1929/1968 pattern then shows a proportionately lengthy move down to an intermediate bottom. Again, interestingly, the next Fibonacci turn date is 2/12/04, a proportionately lengthy period from the 11/16/04 turn date.
We are watching the 10 Day Average Call/Put Ratio with interest for a signal as to when the current intermediate-term decline might be nearing a bottom. Bottoms are signaled when the ratio falls below 1.00. As of August 13th, 2004 the ratio sits at 1.07 - close but not there yet. We would need a ratio around 0.95 to 0.97 to prepare for the next leg up. One thing to keep in mind with this indicator is that it can lead the time of an actual price bottom by a few days to as much as a month. Strong selling over the next few weeks should get us a bottom signal, but from there prices could decline perhaps as much as another month, or they could turn up on a dime.
One thing we notice that is unique to the decline since February 2004 is a great deal of extreme volatility in this ratio - near-touches up and down from 1.00 to 1.40. There seems to be a lot of emotion for both bulls and bears at this time.
The chart on the next page updates the SPX/VIX Ratio. Intermediate-term bottoms occur when this ratio drops below 35.00. As of 8/13/04 the ratio sits at 59.22, nowhere near a bottom. Rather it looks like prices have started their move down in conjunction with a precipitous decline forecasted by the recent Crash warning levels reached in this indicator, consistently clustered above the 68.00 threshold since the beginning of 2004.
Rally days - like Tuesday's - are a necessary part of crashes, working off oversold conditions to sustain the downside momentum. Since January 2000, there have been five stock market crashes in the DJIA & S&P 500. Inside these crashes, markets rallied 20 to 34 percent of the time.
During Crash # 1, which started on 3/8/01 and lasted 10 trading days, there were 3 days the market rallied (30% of the time) and 7 the market declined. Rallies were day three (82 points), day five (58 points) and day seven (136 points). The other seven days lost a total of 1,745 points.
Crash # 2 started on 8/24/01 and lasted 15 trading days. Inside that crash period, there were 3 days the market rallied, days five, six, and seven (20%). Over these 3 days, the market rallied 114 points. Over the twelve declining days, the market fell 2,302 points.
Crash # 3 began on 5/14/02 and lasted 48 trading days. During this lengthy crash period, there were 15 rally days interspersed evenly throughout (31%). Some of these rally days were huge, up 213 points on day 23, up 325 points on day 36, with five days rallying over 100 points each.
Crash # 4 began on 9/10/02, lasting 21 trading days and had six rally days (28%). One of them, day # 15, rose a whopping 347 points. Three rose over 100 points.
Crash # 5 began on January 14, 2003 and lasted 38 trading days. Inside this crash were 13 rally days (34%).
So it is not unusual to expect a stair-step decline that includes rally days - many impressive - as the current slow-motion crash unfolds. They merely add fuel to the raging fire, and anesthetize an unsuspecting public as to the unfolding debacle. But at the end of the day, prices will be substantially lower. So far this year, the Dow Industrials are down 629 points (6.0%), and the S&P 500 is down 47 points (4.2%).
So where are we in this crash? I've labeled the Elliott Wave count we believe is most accurate in the chart above (courtesy www.stockcharts.com). The DJIA completed a truncated minute degree 5th wave up of a minor degree wave C up of primary degree wave (2) up on June 23rd. Since then the DJIA has completed minute degree waves 1 down and 2 up of a larger minor degree wave 1 down of primary degree (3) down (the primary degree wave (3) should last until 2006). Micro degree waves i and ii have completed and micro wave iii of minute degree 3 of minor degree 1 is now underway. This is a possible trigger event area which could inspire panic selling.
The Relative Strength Index is not oversold, at 35.1. The weekly chart's RSI is even more neutral, at 39.1. So there is plenty of room for the DJIA to fall. The MACD is oversold, but not excessively oversold, not even where the prior two bottoms occurred. One very negative development is the decisive cross-under of the 50 Day moving average below the 200 day MA. This does not happen often and it usually portends significant intermediate-term additional selling. The last time this occurred was at the start - about 10 percent of the way down - of the severe 2002 crash.
The NASDAQ Composite Is Crashing Big-time, Down 18.4 % Since January!
The NASDAQ Composite's decline is getting legs, down 396 points, or 18.4 percent, since January 26th, 2004, and down 290 of those points, or 14.1 percent since just June 30th, six weeks ago. The crash is in the books, minimally, but is not finished. The minimum downside target per the Head & Shoulders Top pattern is 1550, another 207 points, or 11.8 percent from Friday's close. Prices have reached the sweet spot for the Rounded Bearish Top pattern, meaning they are east-southeast and headed south (picture a globe).
Ominously, the 50 Day Moving Average has broken decisively below the 200 Day Moving Average, a rare occurrence, but one which usually signals substantial further decline. The last time this happened was the Spring of 2002 when prices were near 1900. Prices subsequently declined 771 points, or about 41 percent, over the next six months.
The RSI is mildly oversold and the MACD is oversold. Perhaps there will be a rebound back up to the Head & Shoulders neckline to reenergize for the next thrust lower. Then again, perhaps not. In Bear Markets, particularly crashes, prices can fall into very oversold territory before turning back up. The weekly RSI is still in neutral territory at 34.2.
Dow Component Hewlett-Packard Has Crashed - Down 36% for the Year So Far!
Dow Jones Industrial Average component Hewlett Packard (HPQ) is down 36.8 percent since January 26th, 2004. It has formed a Head & Shoulders Top pattern, confirmed with this week's downside break that gapped below the neckline on Thursday. Since we first reported this Bearish Head & Shoulders pattern in Friday, July 30th's newsletter, HPQ has fallen 23 percent - has crashed - from 20.15 to 16.50. The minimum downside target per this pattern is 13.00.
While the language of the markets picked up HPQ's problems before they became public, two weeks later, on Thursday 8/12/04, Hewlett's CEO Carleton S. Fiorina promised management changes to turn around the "unacceptable performance." The same day the company reported disappointing earnings for the third quarter and warned that the fourth quarter 2004 wasn't going to please shareholders.
The beauty of the Bearish Head & Shoulders pattern is it picks up the insider's view of the company, and the view of the "smart money" in the price pattern of buying and selling. It simply is a picture of distribution of shares from pros to amateurs. The failure of prices to surpass the Head forms the right shoulder - and indicates strong selling at a level that should not normally resist. It means something is up, something bad. That's why this technical pattern is so reliable.
MACY'S HAS FORMED A BEARISH HEAD & SHOULDERS TOP
The above chart is another sign that the U.S. consumer is about to clamp down on his spending. Good ol' Macy's, Federated Department Stores (FD), has formed a Bearish Head & Shoulders Top, a Double Top, and a Rounded Bearish Top. The price of this stock wants to go lower.
The minimum downside target per the Head & Shoulders Top pattern is 33, determined by measuring the distance from the Head to the Neckline, then subtracting that from the Neckline. No guarantees as to when, but these patterns are highly reliable.
The Relative Strength Index is not oversold and the MACD - also not oversold - is breaking down hard. The 50 day Moving Average has broken decisively below the 200 day MA. The last time this rare event happened, in July 2002, the stock fell 33 percent, from 33 to 23 in three months. After breaking decisively below their 200 Day Moving Average in July, prices bounced back to this level, found formidable resistance and are now headed lower. A break below 44 should see accelerated price decline.
Retail Sales were up 0.7 percent in July according to the Commerce Department. If you combine this with June's 0.5 percent decline, retail sales are essentially flat for the past two months. Autos were the driving force behind July's rise, accounting for 0.5 of the 0.7 percent increase. That's the good news.
New Unemployment Compensation Claims remained unsatisfactory for a so-called recovery that the Fed seems content enough with to boost interest rates in the face of negligible reported inflation. Jobless Claims came in at 333,000 for the latest week according to the Labor Department.
The Producer Price Index increased 0.1 percent in July according to the Labor Department. That's hard to imagine with rising fuel costs - cost push inflation theory - but nevertheless that is what our "integrity first" administration reported.
The Treasury Department reported that the Federal Budget Deficit increased $69.1 billion in July, bringing the fiscal year-to-date figure to a record $395 billion in a mere ten months. The highest twelve-month deficit ever was last year's, coming in at $374 billion. We'll blow past that bad boy by a wide margin.
Not to be outdone in Dubya's competitive administration, the Commerce Department reported that the U.S. Trade Deficit grew to a record $55.8 billion in June. We continue to buy more than we sell at an alarming rate. The exportation of our manufacturing base may someday prove to be a dastardly mistake. What it means is more foreign holdings of our debt. "The borrower becomes the lender's slave," so warns the author of Proverbs 22:7.
Donald Trump declared bankruptcy - junk bonds the culprit this time. I won't do a "You're fired" remark. By the end of the week, this is a washed out cliché.
So what do the Master Planners think of all this? By golly, not too bad. They elected to continue the charade, pretend everything is just fine, and raised interest rates by 20 percent, up a quarter to 1.5 percent. Not only is the consumer facing the prospect of $3.00 a gallon gasoline and heating oil as we watch crude rise, but his home equity loan just increased for the second time in 3 months.
And what do Consumers think of all this? The University of Michigan reported that its Consumer Sentiment Index fell in August, down to 94 from 96.7 in July. What a shock.
Money Supply, the Dollar, & Gold:
M-3 fell $5.9 billion for the latest week reported, August 2nd. Since May 17th, M-3 is essentially flat, up 8.7 billion over eleven weeks for an annualized rate of change of less than a half percent. Our research shows that whenever M-3 plateaus or declines for more than two months, equities decline. M-3's rate of growth supports our Bearish Equities forecast.
We are keeping a watchful eye on this potential Bearish Head & Shoulders Topping Formation. Should prices break decisively below 87, this will confirm the pattern and portend a break down in the U.S. Dollar to the low 80s. The action of the Moving Average Convergence Divergence Indicator is telling us 87 will be breached. The MACD has broken down hard and is now negative. The RSI is not oversold. The 50 Day Moving Average is slightly below the 200 Day MA. Should it break decisively below, the low 80's should be the next stop for Federal Reserve Notes.
Gold the metal is at a point where it must rise or else. It sits near the bottom of its long-term rising trend-channel. A decisive break below the 390 area will violate this rising trend-channel and be Bearish. A fascinating pattern has also developed where Gold appears to be finishing off a Bearish Head & Shoulders Top in its formation of a Right Shoulder of a larger Bearish Head & Shoulders Topping pattern. It is a bit complicated but here's how it looks: Should prices break below 385, that would confirm the Head & Shoulders Top for the larger degree Right Shoulder. That would result in a minimum downside target for Gold of 360. That in turn portends prices breaking below the larger degree H&S neckline at 375. Once that level breaks down, the minimum downside target for the confirmed larger degree H&S Top becomes 316. That could be a terrific buying opportunity as the Master Planners are going to have to pump money into the system like there is no tomorrow once equities and bonds tumble. Long-term, Gold should rise significantly, but first, intermediate-term, there should be an accumulation opportunity coming.
The Gold Bugs Index ($HUI) is sitting at the Bottom of its Long-term Rising Trend-channel. It has formed a Bearish Double Top and Bearish Rounded Top. Its Elliott Wave count calls for a 5th wave decline to the 125 to 150 area. Both the RSI and MACD indexes are neutral. The 50 day Moving Average is significantly below the 200 Day Moving Average, and looks to be turning down once again. The 200 Day MA is declining, which is Bearish. Prices sit at the intersection of the ceiling of the declining trend-channel that began in late 2003, and the floor of the long-term rising trend-channel. A breakout one way or the other should soon be resolved. We believe that outcome will be down.
Long-term Bonds should be collapsing based upon the fundamentals. Record Federal Budget and Trade deficits, overheating economy according to the sages at the Fed (words backed up by their rising interest rate policy), and a declining dollar. But something else is at work for the moment. Declining stocks, benign inflation figures, slowing economic data. What gives?
The charts are telling us that there is deflation risk at the moment, but that at some point Bonds will sink anyway and become part of the deflation problem. Currently Bonds are nearing overbought levels. 112.50 marks the Fibonacci 78.6 percent (square root of .618) retrace of the move down from March through June. Prices should not exceed that level or Bonds could rally much higher, perhaps above the highs in March. There is a massive, multi-year Head & Shoulders Top not shown here that we've shown in previous issues. Perhaps what happens is a U.S. Dollar collapse deflates the tradeweighted value of U.S. Bonds to foreigners who in self-defense begin shifting out of U.S. securities, thus increasing supply. Perhaps.
Oil is rising to levels never seen before. Terrorist threats are ever-present. The Fed is tightening. Economic numbers are deteriorating. Family-supporting employment remains a problem. The twin deficits are setting records. Consumer confidence is starting to crack. We could see an administration change come November - if the current president allows the elections to occur. Technical patterns - the language of the markets - are Bearish all over the place. Uncertainty reigns. Most financial markets are headed lower over the intermediate term. Caution is warranted.
"For just as the lightening comes from the east,
and flashes even to the west, so shall the coming of the Son of Man be.
But immediately after the tribulation of those days,
the sun will be darkened, and the moon will not give its light,
and the stars will fall from the sky, and the powers of the heavens
will be shaken, and the sign of the Son of Man will appear in the sky,
and then all the tribes of the earth will mourn,
and they will see the Son of Man coming on the clouds of the sky
with power and great glory,
and He will send forth his angels with a great trumpet
and they will gather together His elect from the four winds,
from one end of the sky to the other."
Matthew 24: 27, 29-31
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|Key Economic Statistics|
|Date||VIX||Mar. U.S. $||Euro||CRB||Gold||Silver||Crude Oil||1 Week Avg. |
Note: VIX complacent, Dollar down, Oil Hits an All-time High!