Summary of Index Daily Closings for Week Ending October 15, 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 the Dow Jones Industrial Average closed down 121.82 points, in line with last week's Short-term TII reading of negative (58.50). Friday was another options expiration date where options writers don't want puts to expire in-the-money. Eight of the last eleven monthly options' expiration dates have been "up" days (72.7 percent). The DJIA declined the day after options expired in eight of the last ten months (80.0 percent).
Friday's price action in the DJIA formed a mini Head & Shoulders top, and also completed a threewave a-b-c up move, correcting a Fibonacci 38.2 percent of the decline from October 13th's intraday high. So the stage is set for a sell-off on Monday should the market so desire.
Monday is also the anniversary (third Monday of October) of the largest single-day percentage plunge in stock market history, 22.6 percent in 1987. That doesn't mean we can expect a crash on Monday - that can happen anytime. In 1929, the crash occurred over two days, Monday October 28th and Tuesday October 29th, down 23.6 percent. Mondays, Mondays.
|Equities Markets Technical Indicator Index (TII) ™|
|Week Ended||Short Term Index||Intermediate Term Index|
|June 18, 2004||(40.25)||(31.17)||Scale|
|June 25, 2004||(34.00)||(26.10)|
|July 2, 2004||(41.50)||(27.64)||(100) to +100|
|July 9, 2004||(32.50)||(30.21)|
|July 16, 2004||(33.75)||(41.99)||(Negative) Bearish|
|July 23, 2004||(59.00)||(49.98)||Positive Bullish|
|July 30, 2004||46.25||(52.18)|
|Aug 6, 2004||(38.00)||(50.40)|
|Aug 13, 2004||(15.75)||(49.03)|
|Aug 20, 2004||9.25||(43.82)|
|Aug 27, 2004||9.25||(39.81)|
|Sep 3, 2004||(39.25)||(40.06)|
|Sep 10, 2004||(49.25)||(45.78)|
|Sep 17, 2004||(69.00)||(44.73)|
|Sep 24, 2004||(52.25)||(42.02)|
|Oct 1, 2004||25.50||(37.23)|
|Oct 8, 2004||(58.50)||(35.56)|
|Oct 14, 2004||(24.50)||(35.48)|
This week the Short-term Technical Indicator Index comes in at negative (24.50), indicating a market decline is probable. We could see volatility with wide swings both ways. 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 (35.48).
The first chart on the next page updates the Analog we ran last week comparing the DJIA's price action in 2004 versus 1987. Quite frankly, the analogy is astonishing, accurate almost tick for tick, day for day over the past three months. Note the slope, direction, and extent of the price decline over the last two weeks. Analogs work because the mass human psychology of investing is repetitive and patterned. This analog is calling for a dramatic plunge - very soon.
Supporting the crash scenario is the second chart on page 3, showing the divergences between the Transports and Industrials since 1999. In every single instance, each divergence - each nonconfirmation - has led to a stock market crash. Since February, these two Dow indices have been trending in complete opposite directions. This is one of the longest and most flagrant divergences in history. Under Dow Theory, when one of these two averages fails to confirm the price action of the other, it is a signal that the overall trend of the market cannot be trusted. It is a sign that something is seriously wrong.
The above chart identifies a high probability turn period for the current trend in prices - a likely short-term bottom. There are a cluster of dates from October 25th to November 1st that represent a Fibonacci number of trading days from prior Tops or Bottoms. When studying these cluster turn dates, we can normally expect the turn to occur within a day before or a day after the date range. The day before the first potential date puts us at October 22nd, 2004.
Interestingly, if we examine the first chart on page 5, we see that October 22nd is also the key turn date identified using the phi mate formula we've been tracking. Since January 14th, 2000, every significant high or low has occurred either a .382 or .618 percentage of the total trading days from 1/14/00 and another top or bottom. A Fibonacci .382 to .618 ratio is known as the Fibonacci golden ratio. It is the common ratio that each consecutive Fibonacci addend is to their sum. For example, Fibonacci numbers are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc... where the sum of the immediate prior two numbers always equals the next number in sequence. For example, 2 + 3 = 5, and 3 + 5 = 8, etc... Thus 13/34 = .382 and 21/34 = .618. Likewise, 21/55 = .382 and 34/55 = .618, and so on. October 22nd, 2004 is 458 trading days from the 12/27/02 bottom and is 1,200 trading days from the grand top on 1/14/00. 12/27/02 was 742 trading days from 1/14/00. Thus, 458/1,200 = .382, and 742/1,200 = .618. Ergo, 12/27/02 and 10/22/04 are phi mates. It is looking like October 22nd is a high probability date for a bottom - probably a short-run bottom, not an intermediate or primary trend bottom.
We know we are not at a major bottom yet as the second chart on page 5 shows the 10 Day Average Call/Put ratio - a contrary sentiment gage - is at 1.10 as of October 15th. Significant bottoms generally occur when this ratio nears 1.00, with tops signaled by readings near 1.40.
The first chart on page 6 updates the SPX/VIX ratio as of Friday October 15th, 2004. Here we see this indicator at 73.68, warning that the S&P 500 is at grave risk of crashing. In fact, this indicator is coming down from extraordinary highs - near 90 - less than two weeks ago. Even more noteworthy is the pattern this ratio has traced out (denoted in yellow ellipses). Over the past two weeks we see an up-down reverse "V" pattern at extraordinary high readings analogous to the pattern and level of readings registered in 2000 at the grand Bull top. This would make sense if the third major leg - a down leg - is about to occur, the dreaded Elliott Wave 3 in a primary five-wave down-updown- up-down stair-step decline.
We added another chart this week, correlating the NASDAQ Composite index with the ratio of the Composite divided by the VXN - the measure of options volatility premium on the NADSAQ. We see similar findings here as for the S&P 500. This chart is warning that the NASDAQ is in a danger zone where a crash could occur. What is unusual is that it has been in this danger zone for about a year now - a very extended period, acting a bit like the boy who cried wolf. At some point we could become complacent and believe a new paradigm has occurred and a crash is not a risk. But extraordinary declines occurred in 2000, 2001, and 2002 whenever this index approached a reading as low as 55. Today it sits at a neon lights 87.68.
The chart below updates the correlation between the Dow Industrials and the University of Michigan Sentiment Index (MSCI). There is near-perfect direct correlation between the two. On occasion, the MCSI has led - forewarned - future movement in the DJIA. It looks like that is happening right now. Friday showed the MSCI plunging 7.1 percent, portending downside risk in the DJIA.
The above chart (courtesy of www.stockcharts.com) of the DJIA shows prices proceeding lower - as we anticipated - in accordance with the Elliott Wave count we believe to be most accurate at this time. A major top occurred on June 23rd, primary degree wave (2) up from October 2002's Primary degree (1) down. That occurred a Fibonacci phi relationship number of trading days between the start of the Bear in January 2000, October 9th 2002, and June 23rd, 2004. Since then, prices have declined, completing minor degree waves 1 down and 2 up inside intermediate degree 1 down. Minor degree 3 down began on September 7th. Inside that wave, minuette degree waves i down and ii up have completed. We are in process of completing micro degree 3 down inside minuette degree iii down of minor degree 3 down of intermediate degree 1 down of primary degree (3) down. Wave 3s have the most explosive potential. With all the 3s in play, this moment in time has crash potential.
The DJIA has also formed a two-month Head & Shoulders Top pattern. The distance from the neckline (10,074) to the Head (10,363) is 289 points. Subtracting that from the neckline gives us a minimum downside target of 9785. This pattern is confirmed with the decisive decline below the neckline, and thus has fairly reliable, high probability.
The Relative Strength Indicator has not yet fallen to oversold levels seen at prior major bottoms during 2004. The MACD is negative and falling. Again, it is not a levels seen at oversold conditions at prior 2004 major bottoms. The 50 day moving average dropped below the 200 day in August and the divergence has been widening ever since. Both are pointed down. The DJIA is not yet at a bottom.
One of the key reasons we believe the equity markets are not only destined to crash - but soon, is because of the above chart. On page three we showed the divergences between the Trannies and the Industrials since 1999. We noted that each occurrence was followed by a stock market crash. Under Dow Theory, the price action of the Transports must confirm the price action of the Industrials - and vice versa. That means that sooner or later, divergences stop and both indices' prices move back into harmony. Going a step further, therefore, at the present time either the Industrials are about to catapult higher and reach new highs along with the Transports, or the Trannies will decline sharply and confirm new lower lows with the Industrials. One of the two scenarios must happen.
The Trannies are clearly topping - and in a big way. Since this secular Bear Market began in 2000, both averages have traced out primary degree Elliott Waves (1) down and (2) up. The Industrials topped on June 23rd with a truncated 5th inside a larger degree wave C, a common termination pattern. The Transports have - or are days away - from completing their wave 5 of larger degree C. How do we know this? Because not only have they traced out a terminating Rising Bearish Wedge 5th wave of C, but inside that 5th, a lower degree 5th (i.e. "v") wave has also traced out another terminating Rising Bearish Wedge pattern. Both patterns look complete, with a common "throw-over" in process of wrapping up as well. These patterns are also known as Ending Diagonal Triangles in Elliott Wave parlance. The MACD looks to be tracing out a rare Head & Shoulders Top. The RSI has broken down from extreme overbought levels, but remains near overbought, ripe for a decline.
The S&P 500 followed our anticipated price path this week, after tracing out a Broadening Top, a Megaphone pattern. Usually this pattern occurs with rising tops and declining bottoms, however what we see here is a pattern of slightly declining tops and solidly declining bottoms. Regardless, the pattern is Bearish.
The Elliott Wave count is similar to that for the Dow Industrials, however the S&P 500 is slightly behind, finishing minuette degree i down and working on ii up - which may have completed on Friday, whereas the DJIA has already completed that move. Minor degree wave 2 up corrected nearly - but less than - 100% of minor degree wave 1 down. Under Elliott Wave rules, wave 2s cannot retrace more than wave 1 moves. While highly unusual, the Elliott Wave count above is acceptable. Like the Dow Industrials, The S&P 500 is poised to head south.
One change this week is the MACD has now broken down hard from just rolling over last week. The RSI is declining from overbought levels. Prices sliced through their 200 day moving average and got caught by the 50 day MA. We expect that level to fail as well. A possible downside target may be the bottom trend-line of the Megaphone pattern, around 1045. That would require a strong decline going into our Fibonacci turn window of October 22nd through November 1st.
On August 18th, in Issue no. 75's Midweek we presented this chart:
Dow Component AIG Has Completed a Bearish Head & Shoulders Top
This Week, October 15th 2004, Dow Component AIG Plummets!
Lots of numbers this week. Retail Sales rose 1.5 percent in September according to the Commerce Department, the largest increase since March 2004. That's it for the good news.
Industrial Output rose a miniscule 0.1 percent in September according to the Federal Reserve. Capacity Utilization remained at 77.3 percent. Don't look for business expansion anytime soon.
The U.S. Budget Deficit widened to $412.6 billion for fiscal year ended 2004. It is the largest budget deficit in the history of the United States, and the second straight year setting a record according to the Treasury Department.
Mortgage Applications fell 9.2 percent for the week ended October 8th, according to the Mortgage Bankers Association. Initial Jobless Claims came in at 352,000 for the week ended October 2nd, up 15,000 from the week before, according to the Labor Department. Reuters reported on www.cnnmoney.com that the four week moving average rose for the fifth consecutive week, the worst figure since February 2004.
Deflation is nearby, according to the latest Producer Price Index, which was up 0.1 percent in September versus a 0.1 percent decline in August. Now get this: Excluding food and energy, the PPI was up 0.3 percent. So we have oil setting records daily yet PPI is higher without oil. Go figure x#% *^@&. Well, the number did come from the Labor Department - what would we expect.
Speaking of Oil, we learned this week that OPEC President Yusgiantoro believes oil prices will continue to rise at least through November. He blamed it on demand. Yeah, right. And are you wondering if we might see gas lines in the near future? Probably not until after the election.
And as was pointed out earlier in this newsletter, the sum of all factors resulted in today's crushing announcement that the University of Michigan Consumer Sentiment Indicator plummeted 7.1 percent in one month, from September to October. If this reflects independent voter sentiment, Dubya is in trouble.
Money Supply, the Dollar, & Gold:
M-3 fell 40.4 billion last week at a time when the Master Planners want liquidity to rise. Very odd, and not good for the establishment's political prospects. What it means is the rate of borrowing is falling faster than the Fed is printing. Over the past six weeks, M-3 is down 4.5 billion. Over the past twelve weeks it is up 52.4 billion, an annualized rate of growth of 2.4 percent. That is low. Our research notes that whenever M-3 plateaus or declines over a two month period, equities decline. Whenever it rises, equities rise. M-3's rate of change supports our concern for the stock market over the short and intermediate term.
Not much new to report on the U.S. Dollar. The trade-weighted U.S. Dollar looks like it is ready to fall. Prices broke from the vertex of a Symmetrical Triangle to the south. Symmetrical Triangles are continuation patterns and are considered Bullish in uptrends and Bearish in downtrends. The probability is high that breakouts will be in the same direction as the prior trend - in the current case down. Often what follows is an even stronger move in the same direction as the prior trend. What is happening here is buyers are not able to push prices into a new trend. As sellers see this weakness, they gain confidence that the past trend will resume, forcing a breakout to the downside.
The Dollar is now falling from the top boundary of its long-term declining trend-channel, and declined this week to the neckline of its Head & Shoulders Top pattern. Once prices break decisively below 87, the small Head & Shoulders Top will be confirmed, and a decline to the low 80s would be expected.
The Elliott Wave count we believe to be most accurate at this time for the Dollar also shows that prices have further to fall. Intermediate degree waves 1 down, 2 up, 3 down, and 4 up of a five-wave primary trend decline are complete. Where we are now is the start of minor degree wave 3 down of intermediate degree wave 5 down of primary degree wave (1) down. The trend-channel and this count suggests prices could fall even further than the Head & Shoulders pattern targets, possibly as low as the mid to high 70s. But it could take a while. The MACD is negative as momentum is to the downside. The RSI is not oversold.
Gold has retraced more than a normal Fibonacci .786 of the move down from April through May 2004, but seems in need of another correction before challenging the Double Top. The MACD is rolling over and the RSI is retreating from overbought levels. If prices can remain above 370, Gold remains Bullish. If prices can remain above the bottom trend-line, above 392, Gold would look strong. A breakout above resistance at 425 would be Bullish. A push above 433 would negate the Bearish Double Top pattern. The long-term trend remains up.
This week the Mining stocks fell 10 points, strengthening the case we outlined last week for the above Elliott Wave count which we believe is most accurate. Here's the deal with the HUI. It is in a long-term Bullish trend. The question is, where does it stand in the intermediate trend? The Elliott Wave count is ambiguous and can be interpreted three different ways. Last week we stated, "For the above count to be accurate, prices would have to decline immediately as they have retraced .786 of the move down from December 2003." They did. Any decisive move above 237 would mean one of the two other counts are in play. If the above count is correct, wave C down of corrective wave 2 down would likely take prices to a .786 retrace of Intermediate degree wave 1 up - to 138ish.
Should prices move decisively higher, a second possibility is that where we have labeled Minor degree wave A would in reality be Minor degree wave 4 of the rally from October 2002. That would mean we are rallying inside Minor degree wave 5 up, completing Intermediate 1 up. That would likely complete over the next two months, to be followed by a huge decline - corrective Intermediate degree wave 2 down, lasting half of 2005.
A third possibility is that should prices rise decisively from here, corrective Intermediate degree wave 2 completed where we labeled wave A down, and we are off to the races for a wondrous Intermediate degree wave 3 up to the stratosphere. Given the overbought conditions, this is the least likely scenario in our view.
Bonds and Interest rates:
The 30 Year U.S. Treasury Bond may have formed a Double Top to complete minor degree wave c of intermediate degree 2 up. That would be the top count for the most immediate Bearish case. However, wave c of 2 may want to extend - and can do so as long as it does not exceed 120. The ideal Bearish scenario is for prices to immediately decline from here as they have already retraced a Fibonacci .786 of intermediate degree wave 1 down. The RSI is moving back up again, re-approaching overbought levels. The MACD has curled up after declining hard last week, so in sum, Bonds appear a bit like a Hurricane, able to proceed against the upper atmospheric winds and go wherever they choose.
Should equities decline sharply, we would expect an initial flight to quality. But the intermediate fate of Bonds could change, and prices fall, should the Master Planners flood markets with liquidity, and refuel inflation fears. That might take a few months. But for the moment, it appears the Bond market senses deflation - perhaps a recession.
The massive Head & Shoulders pattern above has not yet been confirmed. It would take a decline decisively below 101.5 to achieve that, in which case the probability of a decline to the low 80s would then become quite high.
Equity markets are positioned to crash should they so desire. The Plunge Protection Team is no doubt on the job. Question is, will they succeed? It does appear to be a Hedge Fund game, with money being dumped from one stock or index only to follow another to mania land. Then that bubble pops and traders search for the next Bull to ride. This implies a zero sum game - which equities are not - and once the proper dose of fear is sprinkled, we should see everyone - including the Hedgies - run for cover and find a new meaning and appreciation for cash. Caution is warranted.
"The nations have sunk down in the pit which they have made,
In the net which they hid, their own foot has been caught.
The Lord has made Himself known;
He has executed judgment.
In the work of his own hands the wicked is snared.
The wicked will return to Sheol,
Even all the nations who forget God.
For the needy will not always be forgotten,
Nor the hope of the afflicted perish forever.
Arise O Lord, do not let man prevail;
Let the nations be judged before Thee.
Put them in fear, O Lord;
Let the nations know that they are but men."
Psalm 9: 15-20
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|Key Economic Statistics|
|Date||VIX||Mar. U.S. $||Euro||CRB||Gold||Silver||Crude Oil||1 Week Avg. M-3|
Note: Dollar, Gold, Silver down. Oil sets a new record.