My sense is that we are at the end game during the next two weeks, the final stage of what I think will be a mega crash. I sense this from my extended observations of the 1987 price chart versus the 2010 price chart. The structures are so similar it is not even funny.
Just to sum up some of the reasons why I believe a mega crash is likely to occur:
- The rally since the March 2009 lows was a low volume manipulated rally by government interests. Markets can only be manipulated for brief periods of time but ultimately they tend to resume to where they were trending before the manipulation and reflect real economic realities again.
- The market right now is cranky, in a bad mood, and has a bad looking nervous tape. That is not the type of action you like to see for new bull trends.
- The rally from the March 2009 lows was arguably an ‘automatic rally’ given the nature of the severe plunge into 2008. The downside follow through after automatic rallies are complete in my observation has many times led to crashes (at least in individual stocks).
- IF we are really about to enter a massive deflationary economic spiral it is not uncommon for the market to signal this fact with some type of ‘shock and awe’ campaign. A big crash would do the job and signal to the world that the market has started to price in a zero growth deflationary environment. The market may suddenly start to build in price to earnings ratios of 1 to 5 instead of 15 to 20.
- The Jobs Killer
- The pattern similarity to 1987
- The Astro Cardinal climax aspects which kicked in late June and seem to be exerting some serious downside pressure on the market now.
- Almost no one is calling for a devastating rock bottom crash where prices go down and STAY DOWN. Actually this is not entirely true. Richard Russell has been talking about a crash as well as Bill Mclaren. Bob Prechter is bearish and looking for much lower prices but I have not heard him specifically talking about a huge down move happening in the next couple of weeks. Perhaps he has for his paid subscribers (see elliottwave links on left sidebar). There have been plenty of more underground type sites and blogs looking for a crash however, but not too many mainstream sources from what I have observed.
I have spent many many hours staring at and studying the nuances of the 1987 topping pattern as compared to our current topping pattern. The pattern similarity is strikingly similar. The candlesticks and engulfing patterns are similar. And the final act, the subtly down sloping decline leading to a vertical decline is also similar. We are situated right now in the subtly down sloping decline. The most important question now is, do we transfer into a persistent vertical decline as 87 did. The time similarity is what is missing. The 2010 pattern is taking longer to form and this may or may not destroy the correlation.
But regardless, I have to conclude that the next two weeks must contain the epicenter of the decline, otherwise I will have to conclude that the pattern similarity is a total failure. It just cannot wait any longer given the current pattern similarities. Many stocks right now are in a stance were they have become significantly weakened and are at a juncture where this weakness can transfer to either a final bottom or a climax vertical selling point.
I should say that the absolutely worst thing that can happen to the bears this week is a bullish move with follow through above 1070. That would really cause me a lot of concern for the bear case. Any rally this week or preferably on 7/6/2010 should immediately be retraced the next day to keep this acceleration going properly. A one day July Holiday low volume rally on Tuesday 7/6 would go a long way to recharge bearish energy to the downside the rest of the week. I am thinking that if we do rally 7/6, it would stop ideally near the 1050 range.
There is some talk and concern that the current chart structure resembles that of the July 2009 period where there was a famous head and shoulders topping pattern that failed very badly. That was indeed a horrible failure and it failed very fast with persistent price rises and gaps upwards. I don’t see this happening again now because at that time the 50 DMA was crossing ABOVE the 200DMA and now the 50DMA is crossing BELOW the 200DMA. I suppose it is still possible we get a massive failure but as of right now I do not see it. As I already indicated above if we do rally early this week, I do NOT want to see strong follow through.
The Psychology of the Decline
When I look at the 87 price chart structure against the 2010 structure the parallels are astounding. In a previous post several weeks ago I indicated that the market had to ‘recharge’ and get RSI (Relative Strength Index) values back up to the 50 to 60 range as fuel for another huge drop. This is exactly what happened in 1987 and we did see the market recharge in 2010 in very similar fashion. As it turns out we managed to get back up to 53.5 on the RSI on June 21st, 2010.
But since then (June 21st 2010) we have started to cascade down in persistent slow momentum fashion just like in 1987. It has been a slow gradual slide down kind of like sliding down one of those water slides. The key point however is that once you reach the end of the slide you drop off the edge of the slide and gravity takes over. Gravity took over in 1987 and prices dropped VERTICALLY for 3 to 4 days. It was just those 3 to 4 days that marked the epicenter of the panic and the real price destruction. The previous slide in prices was just the preview.
From a psychological perspective it is fascinating how the initial slow momentum price slide causes many to either go long or stay neutral. Certainly this is understandable because it is very risky to take new short positions after an already overextended slide down. The perceived risk is less to go long because of the oversold nature of the tape.