We believe the stock market has started a massive Bear Market that could last many years. The top arrived for the Industrials in May 2015. Since then, a new Primary Dow Theory Bear Market Signal was generated.
This weekend I found a fascinating analog that I want to discuss and show you. I believe it gives some amazing clarity to the price structure of Blue Chip markets at this time. There is an uncanny analog and similar set of conditions between the first six months of the 2007-2009 Great Recession Bear Market and the 2015 Bear Market, from May 2015 to now. If such an analog is truly valid, then the corrective rally the past two months is perfectly in line with what we saw at the start of the horrific Bear market of 8 years ago. Further, if this analog is valid, then stocks are topping right now, a significant top is imminent, and a mini-crash leg down is next. At least that is precisely what happened in early 2008 after very similar price action and internal measure conditions.
There are uncanny similarities between the start of the Bear market of 2007 through 2009 and the Bear market that started this year in May 2015 through now. During the last Bear Market, the Great Recession, stocks topped in October 2007, but the drama did not unfold for another 10 months. That could be the case again here in 2015/2016. The Bear market that started in October 2007 had an initial four step pattern of decline and extended rally from October 2007 through May 2008 very similar to what we have seen from May 2015 through October 2015 (interestingly, the same amount of time, but with the months reversed). There was a small initial decline, then a small bounce, then a mini-crash, then a multi-month rally. In comparing today with then, we can analog it and identify the uncanny similarities (see charts below).
Here are a few observations: In 2007, the 50 day moving average fell below the 200 day (the Death Cross) during the initial mini-crash phase. Also, prices fell below both moving averages around the same time. This also has occurred here in 2015. Then, back in 2008 during an extended multi-month corrective rally, prices rose back up to the declining 200 day moving average, gave it a kiss goodbye, and in 2008 that was precisely the place where the extended corrective rally finally topped. That same move just happened this week in 2015. Prices have kissed their 200 day moving average. If this analog holds up, then we are about to start the next leg down of what will be a harrowing decline. Note that the Bear market did not plunge straight down in 2007-2009, but rather had a series of mini-crashes and large crashes separated by lengthy extended corrective rallies. This could be the case again now, and if so, the next mini-crash could begin soon and last several weeks.
If we focus on the first corrective rally after the first mini-crash of both Bear markets, we see that the corrective rallies are 3-3-5 Flat patterns, with the first leg up having 3 subwaves, not five. We also see both corrective rallies had "failed" small Head and Shoulder tops early in their development. In both instances the Daily Full Stochastics reached overbought levels at the end of the Flat pattern. The other fascinating point is this occurred at the end of George W. Bush's second term and is now occurring again at the end of Barrack Obama's second term.
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For I have come down from heaven,
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John 6: 35, 38, 40