In my last essay, "Bernanke's Test Has Arrived", I predicted a severe decline had just begun and luckily nailed it. Since the essay was published, the NASDAQ index declined from 2272 to today's close at 2037, or just over 10%. This essay is to serve as a brief update: I expect this may be the beginning of what will soon become an outright market meltdown. This is partially indicated by a Bearish Diamond formation which has formed on the NASDAQ and broke down this week. I'll elaborate on this soon, but first a summary of the geopolitical situation leading to what I expect to be a continuation of the recent decline.
The Strategic Picture: Mideast Conflagration
This week Israel was forced to take decisive military action against Hezbollah, an officially recognized Islamic terrorist organization which is located in southern Lebanon and headquartered in Damascus, Syria. This Islamic Nazi-like organization, after months of continuous and indiscriminate rocket and mortar fire into northern Israel, made incursions in which they killed several soldiers and took two hostage. This was the last straw which triggered Israel's current military operation in which they are attacking Hezbollah's stronghold in Lebanon, a country which is supposed to be sovereign where in actuality it's incapable of influencing this terrorist organization and remains a puppet of Syria, a known sponsor of terror and on the "B List" of the Axis of Evil.
Although the routing and dismantling of the terrorist infrastructure of Hezbollah is the current objective of Israel, their terrorist sponsors, Iran and Syria, have it coming too, as the recent longer-range missiles launched by Hezbollah into the Israeli town of Haifa were reportedly Iranian made and Iran funds Hezbollah with between $15-20 million per month. This leads me to believe that Tehran is the next target as Israel isn't about to let a nation which actively funds terror and has sworn to "wipe Israel off the map" to gain access to nuclear weapons. No sane country would.
One way or the other, the United States will be drawn into the conflict causing Iran to reduce its oil shipments sending oil well past $100/bbl, or cut them off altogether by blockading the oil aorta of the world, the Persian Gulf. Using oil as a weapon is the same thing they did the last time we backed Israel during the Yom Kippur War, and I believe with oil prices already pushing $80/bbl the markets are pricing this in as an inevitability. The coming oil shortages will cause the United States to implement coast-to-coast gas rationing in either one of two ways: by price or by inconvenience. Richard Nixon was the first president in history to engage in price fixing: he fixed the price of suddenly scarce oil when the Arab Oil Embargo was in place in 1973 and this caused the infamous gas lines. Either we'll see a repeat of that situation or the government can allow the free market to jack up prices to levels that most can't afford. Either way, this is likely to happen very, very soon. It would be wise to take appropriate precautions suitable for your circumstances, as following this rational line of thought leads me to conclude that the American way of life as we have known it for decades is about to come to an abrupt halt.
I am providing this information as a backdrop for the market commentary that is to follow, as this situation is sure to influence markets, both global and domestic.
Diamond in the Rough
After making the "W of Doom" formation at its top, the NASDAQ stock market declined severely and then developed a Bearish Diamond continuation pattern. This NASDAQ Daily annotated chart has been adjusted and updated from my previous essay and I calculate a target of 1952, or a drop of just over 4% from today's close, from which I'd expect a bounce, although the ultimate target could be much lower:
The Long-Term NASDAQ 100 Index Weekly chart looks much more ominous when compared to the NASDAQ chart of the Crash of 1987. Note how deep and steep the decline was as shown by the MACD then and now. If today's decline is to continue to a similar MACD level, the market has much more to fall.
Now compare the above to the Crash of 1987 chart and one can tell that the decline today is more orderly and less shocking than its predecessor, although with a war situation, the real shocks are probably ahead. Amazing how history appears to be repeating for the off-to-a-rough-start rookie Fed Chairman Ben Bernanke as it had for Alan Greenspan:
Today's stock market's emulation of 1987 is uncanny and should have a decline of about 4% left before it hits a level from which it can mount some kind of reaction rally. In times of geopolitical strife, one can conclude that the market is feeling around for levels that reflect the realities of today's increasingly scary world. I would expect that should a crisis in the middle east be averted, the market will find a floor rather quickly. However we are together entering unchartered territory (terrortory?) and the market hates uncertainty.
I would like to say a prayer for Israel and the United States as we collectively enter this dark hour. Israel is merely the flashpoint of Islamic terror which once again threatens to envelop the entire free world with the jackboot thuggery of fundamentalist Islamic oppression. Israel's fight is our fight whether you want it to be or not. Let us hope and pray and fight to keep her free and safe from both her overt enemies and the suicidal "Roadmap for Peace" plan that the United States has forced on her in order to carve out a terrorist state from the Biblical heartland. Let us fight for freedom and to make sure no people ever again be subjected to dhimmitude. Don't tread on me, Islam.
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Let freedom reign.