Steht der Crash bevor? Lesenswert (englisch)

Holiday Schedule: Next week's Midweek and Weekend issues will be combined and published on Thursday, December 23rd. The next issue after that will be as of Wednesday, January 5th, 2005.

This week the Dow Jones Industrial Average closed up 106.70 points, in spite of the risks noted from last week's Short-term TII reading of negative (88.25). It is the holiday season, and clearly excessive optimism is trumping the patterns. The DJIA has completed a perfect little Head & Shoulders top from Monday through Friday this week, and we have a five-wave decline today, so maybe the top is in. We'll see. We continue to believe it is a major top unfolding and will be looking for a gentle sloping descent after the first of the year - maybe starting next week, with a sharp decline eventually unfolding in the first quarter 2005. Friday was a key reversal day, with the DJIA hitting a new rally high, then closing down for the day, another reason to believe a top may be in.

Our two sentiment charts continue to warn of a significant correction. The first one on the next page, the SPX/VIX Ratio, set an all-time record high Friday December 17th, 2004 of 99.93 - Bearish. Major tops take a while to form, and by the looks of this chart (which covers this ratio going back to 1998), the pattern looks very similar to that which formed at the 2000 all-time S&P 500 price peak. Since 1998, whenever this ratio has climbed to 68.00, a stock market crash followed starting almost immediately. The lone exception was in 1999 when a year-long warning of readings above 68.00 foretold the massive top to come in 2000. We have a similar situation again. Since late 2003 we have seen a yearlong series of readings above 68.00 without a crash. Our take on this is that - like 1999 -we are being forewarned of another major top, one that will be followed by a decline of perhaps as much as 30 to 50 percent. How can this be you ask? We believe this ratio's pattern is telling us that the start of the ominous Elliott Wave primary degree (3) down is about to begin (within the next two months). The SPX/VIX ratio is at a similar peak spike reading as in 2000 that kicked off an immediate decline that eventually took the S&P 500 down 50 percent over two years.

The second sentiment chart - a contrary indicator - is the 10 Day Average CBOE Call/Put Ratio. Consistent with the SPX/VIX's warning, the Call/Put Ratio has triggered a sell signal by dropping below its 1.40 topping threshold to 1.35 on December 17th, 2004. Tops are indicated by readings above 1.40 and bottoms are indicated by readings below 1.00. Sell signals occur once the ratio declines back below 1.40, and buy signals occur once the ratio rises back above 1.00.

The chart below is another of many Analogs we are tracking that warn that investor psychology in 2004 is the same as seen at major tops just prior to stock market crashes in past years. This one compares the price action of the S&P 500 during 2004 with the price action in the Dow Industrials just before the most famous and devastating of all crashes - 1929. The correlation is incredible and if the analog holds up, we should see the S&P 500 meander higher for another week or two, then like a roller coaster at the top of a hill, gradually and slowly decline until all the cars are finished climbing, free falling into a fast and furious descent, the worst of which would occur from late February 2005 throughout the typically horrid month of March. Back in 1929, record Bullish sentiment reigned and there was no hint of collapse. They didn't have the plunge protection team to bail them out back then, but they did have powerful individuals who stepped in to stop periodic sharp declines throughout early 1929, and were successful in keeping the markets buoyed. But by October 29th, their efforts failed and prices plummeted. It will be interesting to see if the PPT can stop the coming slide of 2005.

The above chart (courtesy of www.stockcharts.com) shows that the Dow Industrials completed their impulse rally from October 25th with a micro degree 5th wave top at 10,739 intraday on Friday December 17th, which we have labeled minuette degree wave v. Originally we believed that this was minuette degree wave i of v up, largely based upon the power of the move (thus we expected much more to come). However, the pattern of the top and the Bearish divergences with the RSI and MACD lend strength to the argument that this minor degree wave 5 is about over.

We see a Broadening Top - a Megaphone - which is a highly reliable topping pattern. Plus, today's price action creates a Double Top with February 2004. The Elliott Wave count in the S&P 500 looks like a minor degree wave 5 top, so confirmation between these two major averages would suggest the DJIA is also wrapping up a minor degree 5. Another reason to believe primary degree (2) is topping here is that minor degree wave 1 (from March 12th, 2003's low of 7,416 to April 7th, 2003's high of 8,520) is within 70 points of being equal to minor degree wave 5 (from October 25th's 9,708 low to December 17th's 10,739 high). This is important because when the third wave extends (and minor degree wave 3 of intermediate degree C did) then waves 1 and 5 tend toward equality. We have equality right now. The DJIA could rally another 100 points or so and all of the above would remain valid. Given the holiday period coming up, another 100 points cannot be ruled out.

Money Supply, the Dollar, & Gold

M-3 remains 13.7 billion below its level two months ago, showing that both the velocity of money and the Fed's open market operations are keeping a lid on liquidity. Our research shows that whenever M-3 plateaus or declines for two or more months, equities subsequently decline. The latest money supply figures support our forecast for a major intermediate-term top in equities.

The trade-weighted U.S. Dollar started its minor degree wave 4 up correction that we've been expecting. Minuette degree waves a and b appear to be over, with c left to complete. Proportionality suggests this wave c of 4 has perhaps another two weeks to finish before the final minor degree wave 5 takes the U.S. Dollar to a bottom for a while. That low would also be intermediate degree wave 5 down of primary degree wave (1) down - the culmination of a multi-year long-term decline. A major reversal should then unfold - an A-B-C corrective primary degree wave (2) up that could take the better part of 2005 to complete. That rally should retrace a Fibonacci percentage of the wave (1) decline. Following that would come a calamitous decline - primary degree wave (3) that should take the U.S. Dollar to new all-time lows and push Gold to all-time highs.

The chart on the next page (courtesy of www.stockcharts.com) shows an Elliott Wave count for Gold over the past three years. The sharp decline the past two weeks comes off the Rising Bearish Wedge pattern we've been showing for several issues now, so is not unexpected. Proportionality argues that once Gold is oversold, a minor degree wave 4 will be finished and one final push up to a final top in Gold for a while will be in place - minor degree 5 of intermediate degree wave 5 of primary degree wave (1).

An Ascending Triangle is still in play, and is one of the reasons we feel it is a bit early for a final primary degree wave (1) top at this time. The Ascending Triangle projects an upside target of 500 before any significant correction. That target is arrived at by taking the distance of the widest part of the triangle and adding it to the spot of the breakout. Maybe we get to 500 or maybe we don't before primary degree wave (2) starts, however prices still remain solidly inside their long-term rising trend channel and one more meaningful thrust higher over the next month or two would not surprise us. A decline below 375 would negate the Ascending Triangle pattern and indicate that primary degree wave (2) is well underway. This correction could take the form of a zigzag and push prices sharply lower, or it could take the form of a "flat" sideways consolidation - perhaps even a symmetrical triangle - meaning the correction could be milder and not push Gold down more than 38.2 percent of the primary degree wave (1) rise, to about the 375 area.

The Gold Bugs Index ($HUI) charted on the next page has followed the path we expected from its mid-November top as outlined back in issue no. 97, November 5th, 2004, declining 40.41 points (16.2 percent) from its 248.18 high on November 17th to December 8th's micro degree wave 3 intraday low of 207.77. The HUI is in the last leg of an Elliott Wave minor degree consolidation - wave C that should take prices down below 180 over the next several months before turning back up in earnest. So far the HUI is finishing up a minuette degree wave i of v down. The RSI has predictably plummeted from a rare Head & Shoulders top formation to oversold levels, the place where minuette degree wave ii up can grab the baton for the next short-term path. The MACD also fell sharply from a Head & Shoulders top formation and momentum is now clearly down. Neither the RSI nor the MACD are anywhere near the levels seen at the last significant bottom, back in May 2004.

Silver has formed a Bearish Flag pattern (upside down from a Bullish Flag pattern) with a minimum downside target of 5.20, arrived at by measuring the height of the flagpole subtracted from the likely breakout point from the flag. What is happening here is that after the Bears have taken sizable profits from the recent plummet, those long who stayed in are battling with new sellers to see if the market can reverse - ergo the upward sloping small trend back and forth volatility (the Flag). Once buyers realize that the trend will not reverse, they will give up, panic selling will take hold and the downtrend will resume. No guarantees, but this pattern is one of the more reliable ones in technical analysis.

Bottom Line: As we slowly approach a major top, the holiday season and post election euphoria anesthetizes the investment community, and threatens the innocent. A decline can begin at any time, however the sharpest slope downward will likely occur in early 2005. Caution remains warranted.

Coming Soon: In early 2005, we will be introducing a new feature for those who are interested in trading. Trader's Corner will document options trades only available on our website at www.technicalindicatorindex.com. Subscribers can contemporaneously follow our purchases and sales based upon what we believe to be high probability trading opportunities in the markets.

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18 December 2004

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.