This is my old update page from 1998. I have left this page entact in order to show you the mistakes I made back then.
Welcome to my short-term update page. Bookmark this page. I will try to update this page on a weekly basis.
One of my readers told me that I should change the above to PANIC! I disagree, because panicking is never a good idea. I don't want you to end up selling your stocks for too little at the bottom of this crash. I expect a huge bounce after the crash which will give you an opportunity to get out of the market. My charts and short-term updates below should give you an idea of where we are at on the "curve" so that you may sell at the best possible time.
History does repeat itself and it's happening again, right now. I'm amazed at the similarities between the 1929 market and today's. It seems like the closer we get to the crash, the more similarities there are between the current chart and 1929. Just look for yourself.
The following chart is a real-time comparison between the '29 and '87 crashes and this year's market. This chart starts all three years out at the same point in January using today's DJIA price and is based on percentage of movement.
Following is a log of my short-term forecasts sorted by date with the most recent update first.
November 15, 1998 - Friday had an 89 point rally on the Dow with flat breadth. Breadth of 1.01 is very weak for a day with an 89 point rally. In fact, I think it's a record. Breadth has been the single most reliable indicator to determine short-term market strength/weakness. The problem is that it is only short-term and doesn't help to determine the size and duration of the movement. I believe that the Dow could pull back over 300 points in the next few days with support around 8,600. This would seem to fit in with the scenario of the Fed holding rates steady on Tuesday and the ensuing sell-off. The bargain hunters would then dive in and drive the market higher. This speculation rests solely on the belief that the market is going higher, much higher. Robert Prechter remains 400% bearish, but I don't think that he has considered the following 4 charts. The market is a many patterned thing. I find it interesting that this "flat topped hump" pattern appears just before the two biggest bull market tops this Century AND just before the '87 Crash. Consider these charts:
The '87 chart differs from the others as it is not a market top, but simply a correction during a bull market. Even so, the "flat topped hump" pattern is clearly visible just before the final rally to the top. It is also clearly visible in '29 and in a longer cycle from 1960-62. The timing of these three charts point to our market topping in the summer of 1999. How high can it go? Let's run some numbers. I've found a relationship between the "hump" rally and the final rally to the top in both '29 and the 60's. First, 1929, 29.9%/10.3% = 2.9. Now, '59-'67, 85.3%/29.8% = 2.86. 2.9 & 2.86 are pretty close. Let's shave it off to 2.8 and multiply by this year's "hump" rally. 23.2% x 2.8 = 12,439. Yes, that's a 12,000+ point Dow! I'm not sure I believe this number. I think that we might have just had a really big hump - which, incidentally, is what threw me off in the first place and fooled me into believing that this was the final top. I think that the actual number might be about 1.8 x 23.2% or 10,682 on the Dow. The market should be at least half way to the top by March '99. At that time, I should be able to tell which target we might hit. The psychology of all this is very interesting. After the '97 13.3% mini-crash we were told that "the worst has passed". They were wrong. Now, after a 19.3% correction we are once again told that the "worst has passed". There's a certain calmness over the market these days. Investor optimism and complacency seems to have reached an extreme level. They have seen corrections "come and go" and the market "always comes back" each time. The timing of this top is also very interesting. We can see clearly from the above charts that the final top should occur mid-1999 regardless of the year 2000 computer problem. Even if there was no Y2K problem, the market would still crash. There was no Y2K problem in 1930, nor was there anything comparable in any other previous market tops. This is the "wild card" which just happens to occur about 2 months after I expect this market to crash. What is Y2K? Gary North does a good job of scaring people about Y2K, but how much of it is real? The "worst case scenario" is that computer malfunctions cause a nuclear missile launch which, in turn causes World War III. While a nuclear accident is highly possible during the confusion caused by computer malfunctions, I don't think that WWIII will be possible until after a long depression, the social mood is just not right, nor is there any real nuclear enemy right now. I believe that Y2K will be more of an economic problem than anything life-threatening. Businesses will lose billions while re-building their computer systems from the ground up. The timing of this couldn't be worse when you overlay the market picture. We are indeed headed for some very hard times. That being said, I believe it is a good idea to stockpile some food in the event that there is an interruption in the food delivery system. It's conceivable that a disruption like this might last for months. If you want more information on this, check out www.garynorth.com.
This will probably be my last update this year unless I see something that changes my opinion. I've been too close to this market for too long and need a break. I will leave the rest of this site and my previous updates unchanged. I'm keeping my old updates on this page as a reminder for the next time that I'm 99% sure of something. -CR
November 8, 1998 - It looks like I'm early, once again. The window is closing on a November crash, although it's not shut yet. The Dow would have to lose 1000 points next week for the crash to happen on the 16th. The other slim possibility is that of a December crash. It's not too likely, but the scenario might be this. The market hits 9000, then slides slowly until the Nov 17 Fed Meeting. Rates are held steady, the dissappointed market slides through Turkey day to crash the first week of December. December 7, 1998, a day that will live in infamy? Not likely. If you have followed my advice, then like me, all you have lost is about $500. I know that some of you have lost much more than that. I feel your pain. It's not a good feeling losing money, especially when there are wet-behind-the-ears-bull-market yuppies sneering at you at the same time. I've got a saying for you that might help. "Those who laugh last, laugh best". Anyone with common sense who views historical DJIA charts can tell that this current Bull Market is the biggest ever. That same common sense says that the bigger they are, the harder they fall. This Bull will end with a Crash and a Bear, the size of which has never before been seen. Rest assured that those yuppies will have all of their money in stocks during the crash -- buy and hold to the grave. At the same time, you can turn $500 into $500,000. Now on with the update. I've noticed that the breadth has improved dramatically and the market is displaying other Bull Symptoms (yes, that's B.S.). I've also found confirmation in the '29 chart. Notice the similarities in the slides of 5/29 and 9/29. They are almost identical! At least I have a good excuse for being early. The 5/29 slide was only 1 week shorter than the 1st step correction in Sept '29. Also notice that I've put lines in comparing the rally afterwards to the current rally. If I'm right about this, then there will only be a minor correction in the next few weeks, then the Dow will shoot straight up to 10,000 within just a few months. Volatility should also subside with a sideways "hover" around 10,000. This also means that we should reach my original target of 10,600+. It also means that we will have a slide next year similar to this one, but longer. I expect the market to top out about a month earlier, sometime in June 1999. Then a slide similar to 7/17-8/31/98, just longer. October '99 would then be perfect timing for the crash. So, if the market stays above 8500, then we're in for another leg-up. Remember, though, this still may be a right shoulder until we've reached a new high. If we do reach a new high, there will be nothing between the DJIA and 10,000. Maybe we should be buying Calls right now. It's a good thing that I have a lot of patience. I WILL be here when it's time to write this Bull's obituary. Until then, I will remain CrashReady.
The long term "hump" from 1/9/98 to 8/31/98 is very similar to the "hump" from 3/26/29 to 5/27/29. It is 4 times longer and more than 2 times more volatile. The rally that created the '29 hump was 10.3%. The '98 hump was 23.2%. Then both "humps" came down to close below their starting point before the final rally to the top began. You can see all of this in the charts above. I've also discovered this "hump" pattern over a longer period of time from 10/4/60 to 6/27/62. This hump also occured just before the rally to the top and rallied 29.1% before coming down to close below it's starting point. It was almost 5 times longer than the current hump, but less than 6% more volatile. This is yet another hint of the size of things to come. I find it interesting that in '29 the market flew up from this hump to just below 350 and then hovered sideways for several weeks before piercing this "barrier". This could be the case for the 10,000 point barrier. If we stay at 4x time duration, then we should get just below 10k around January, then float with light volatility for about 3 months through April 1999, then have a smaller "hump" similar to the one we just had, but lasting only about 1 month, then the final rally to the top which should last about 2-3 months. The final top might look very similar to the "hump" we just had, just like the top in '29 vs. the "hump" in '29. The psychology of this is perfect. People will not be worried at all, because only a year ago they saw the same thing and "The market ALWAYS comes back, doesn't it?". Below is the chart that shows the 1960-62 "hump".
November 2, 1998 - This market never ceases to amaze me! It's time for another reality check! From it's intra-day low on 10/1/98 of 7467, the Dow, in one month has rallied 17.1% to 8742, or -6.37% below the top of 9338, which is 69.7% of the way back to the top from the low on 9/1/98. The S&P 500 has rallied over 20% during the same month to 1111 leaving it down -6.6% from the top of 1190. The Nasdaq has rallied 32.7% in one Month from 1357 to 1800! That's 23 trading days for an average of 1.42% per day! How sick is that! The Nasdaq is now down -11.2% from it's all time high. If we have a repeat of last year, then, during November, the Dow will now lose 60% of what it has rallied since the mini-crash, or 750 points. While this is a possibility, I don't think that it's going to happen this way 1) because that's what Wall Street wants you to believe and 2) the market almost NEVER does what it did in the previous year. I see two possibilities. 1) The market will either continue to rally to a new high with only minor setbacks along the way, or 2) We will see the crash unfold over the next 3 weeks. I believe that the last few months of market activity has really gotten the attention of many Investors. I also believe that there are quite a few Investors (say 3%) who are ready to pull the trigger and sell as soon as this rally starts to slip. This 3% can bring the market down 15-20% which will start an avalanche due to the already-weakened market. Nobody realizes just how fragile this market is. It takes lots of buyers (and money) to make the market go up, but very few sellers to make it sink. I like to think of the Bull/Bear market like an enormous, really inefficient Piggy Bank. People can feed it $10 Trillion during the Bull market, but when they break the Piggy Bank during the Bear market, there's only $2 Trillion inside! It's like paying $1 Million for a house and then a few years later it's only worth $200,000. It's amazing that noboby has learned from the history of Wall Street. This cycle has repeated itself just about every Decade this Century! It has been slightly different each time, and has never been this big, but basically, it's the same concept each time. OK, enough of me on the soap box. All three indexes now show two back to back up-down-up corrective rallies forming a larger up-down-up similar to the action from 9/1/98-9/24/98. The difference this time is that volatility to the downside has reduced. The calm before the storm has finally happened. The timing couldn't be better for a Tuesday turning point. We might see new highs tomorrow, but I expect that to be the final top. There are elections tomorrow and a full moon will be out tomorrow night leaving the perfect atmosphere for a turning point. After October's record-breaking, straight up insanity rally, who has any cash left to buy stocks? The market now has to be at least as overbought as it was on 7/17/98. How many Investors are ready to sell stocks? Hint: more than were ready to sell from 7/17-8/31/98. I had to share the 1 year chart below with you, it really shows the insanity of this rally. Also notice the differences between the 10/27/97 and the 8/31/98 mini crashes. The '97 mini took almost 3 months from top to crash bottom. This time, it took only 1.5 months. This, and the lack of a substantial right shoulder underscores that 7/17-8/31/98 was just a first step back and we are now sitting close to the top of the right shoulder. From the top on 8/6/97 to the bottom of the 1st step correction on 9/11/97 was about 1.2 months. If this time ratio holds true, then the crash bottom this time should be about 3.75 months after the top. The top on 7/17/98 was 3.5 months ago. It's also interesting to note that the up-down-up from 9/1-9/24/98 took over 3 weeks while the correction only took 6 days bottoming on 10/1/98, exactly 1 month and 1 day after the mini-crash bottom. Today is 1 month and 1 day after that bottom, forming a 2 month larger up-down-up corrective rally. The Dow fell 700 points during those 6 days from 9/23-10/1/98. This time it might fall over 4,000 points in 9-14 days. This market is as ripe as it's going to get. Here's the chart.
October 31, 1998 - Happy Halloween! October may be over now, but the nightmare on Wall Street hasn't even begun yet. Don't be fooled into thinking that the market has to crash in October. The prediction I made said "the market will crash on October 19, 1998 or WITHIN THE FOLLOWING THREE WEEKS. That gives me until November 9 to still be correct. At this point, I wish I had said four weeks, because it might not happen until November 16, 1998. I knew that this market might crash late, just like '29. I also knew that this market can move much faster, even faster than in '87. Thanks to the internet, investors can react much quicker now than they could in '87. Now, on with the update. We've definitely deviated from the pattern that I was following. Don't be fooled by the strength of this rally. The Dow was only barely able to break the intra-day high by 7 points before hitting stiff resistance and coming down 70 points to close. This now infamous "second hump" pattern is very similar to the one on 7/30/98 which broke the previous hump's high by 13 points before the Dow slid 680 points in the following 4 days. This pattern is also very similar to the long term pattern with the Dow topping out on July 17, 1998 just 126 points above the previous "hump" on 5/13/98. MARKETS ALWAYS RALLY BEFORE THEY CRASH! It's called a "right shoulder" or a "bounce" or a "B" wave, etc., etc. It happened in '29 and '87 and it's going to happen again now. This rally is not healthy. All you need to do is to look at an intra-day chart to see this. The rallies are straight up! It's almost as if the chart is turned upside-down and you are looking at a mini-crash! To illustrate this, please direct your attention to the chart at the top of this page. Notice the '97 mini-crash which is labeled at -13.3%. Now notice the rally after the crash. First, notice how steep the rally is. It was a smooth, almost straight line, that took 1.25 months to move up 988 points. Now look to the right on the same chart. Notice the 8/31/98 bottom labeled -19.3%, notice the shaky recovery rally which lasted 1 month and ended with another closing low of 7632 on 10/1/98. Now notice the steepness of the rally after that, the Dow went up 900 points in 3 weeks! You can see from this chart that the rally after the '97 mini-crash was much "healthier" than this current rally. Even so, there was a long term aftershock which took the Dow down 570 points one month after the recovery rally topped out. It's also interesting to notice that the Elliot Waves have inverted, as they should when the market switches from Bull to Bear. You can clearly see the 3 waves down (2 steps back) which led to the mini-crash and the 5 waves up (3 steps forward) during the 5 weeks after the mini-crash. On the correction from 7/17/98-8/31/98 you can see 5 waves down and only 3 waves up during the rally since then. Don't think that this crash can't happen. Basically, we are standing on the edge of a cliff right now. When I said that it only takes 10% of investors selling to crash the market, I was actually overstating the facts. Only a small portion of that percentage will actually make the decision to sell. The majority will have no choice but to sell due to margin calls and other forms of leveraging. Then the funds will have to sell in order to stay solvent. This "domino effect" will unfold very quickly during the crash. Don't get caught in it's path. Get out now, while you still can. Here's the chart for the week compared to the chart ending 12/8/97. These two charts are similar in the respect that they are both tops after mini-crashes and that they both topped out on a Friday. Notice that the 12/5/97 top is preceeded by more of a gradual rally than the current one. The current rally has gone up over 300 points in 2.5 days, while the top on 12/5/97 rallied 200 points in the same amount of time. Also notice that 60% of the current rally happened in the last 1/2 day before the top. This current rally seems to be very desperate. From these charts we can see that the rally ending 12/5/97 was much healthier than this current rally. Even so, 12/5/97 was a bad time to buy, just 1 week later the Dow was down 300 points and 1 month later it was down almost 600 points! I believe that now is also a bad time to buy stocks. In fact, I believe this may be the worst time in well over 200 years to buy stocks.
October 27, 1998 - It's time for a disclaimer, a confession, and some anniversaries. First, the disclaimer. The market can do one of two things from this point. 1) It can crash or 2) It can find support around 8,000 and then continue to rally higher. NOBODY CAN PREDICT THE SHORT TERM MOVEMENTS OF THE MARKET. While I am confident of my long-term picture, my timing could be off by years for the crash. Now for the confession. I originally thought the market was going to crash in '97. Originally, I was going off of the advice of some trusted sources. After looking at the charts in October '97 I remember telling myself that I was 95% sure that the market would crash at that time. I was wrong, but partially right because we did have a mini-crash on Oct. 27. I lost some money at that time because I was expecting "the big crash". That's when my heavy-duty research began. In retrospect, I'm glad that the crash didn't happen then, because I value the lessons that I have learned from that experience. When I first posted this Web Site in June of '98 I was 99% sure that the crash would happen this year. The difference this time is that I am trusting my own research and not just following other sources. Now, after seeing the above chart ('29, '87 & '98), I am 99.9% sure that the crash is at hand. This right shoulder has '29 written all over it. Now that the slide has finally begun, we can see that the bottom of the crash should be on Tuesday, November 10, 1998, just 3 days before the November 13, 1929 aftershock bottom. The alternative would be the following week of November 16th. After that, the window of opportunity for a crash will be over. I don't think that the market can physically crash during the week of Thanksgiving. It makes sense that the market will bottom in mid-November, then bounce and float over Thanksgiving before the aftershock in early December. We have some anniversaries this week worth mentioning. First, today was the 1 year anniversary of the mini-crash of '97. Wednesday, October 28 is the 69 year anniversary of the '29 crash with the Tuesday bottom of the crash on Thursday the 29th. Now, on with the update. We are sticking to our pattern pretty well, although it's unfolding painfully slow. It's a bit like watching a train wreck in slow motion. We saw the "D" that I was looking for a day late on Tuesday morning. I think that you'll agree that it is an enlarged duplicate of the "D" on the 8/25 chart. Our support levels are still the same with the first big bounce of about 100 points happening around 8,000-8,100, then a spike down to support around 7,900 where I expect about a 200 point bounce before the next, steeper decline begins. This could happen as quickly as tomorrow with the bottom on Friday, or it could carry until next week. Tuesdays seem to be a common turning point for the market. We saw the top last Tuesday, a Tuesday was the top on 8/25/98 just before the mini crash, Tuesday is usually the last bounce before a crash, and all of the crashes and mini-crashes have bottomed on a Tuesday. I expect next Tuesday to be a turning point as well. Here's the current chart.
October 24, 1998 - There are some interesting things we can notice on the charts above. On the closing price chart, notice where the right shoulders fall. The '29 right shoulder was 1 week after the '87, and the '98 right shoulder was 1 week after the '29. Both '87 and '29 took about 2 weeks from the right shoulder top to crash. Based on this chart, I would expect the crash to take 3 weeks this year which would put it on November 9. On the intra-day chart above, we can count 23 days (week days) from the all time high to the 1st step correction in 1929. This year I count 31 days for the same correction. Using these numbers, we can say that this years market corrects roughly 1.35 times as fast as in 1929. From the right shoulder top in 1929 to the crash bottom is 12 days. 12 x 1.35 = 16.2. 16 week days from the right shoulder top on 10/20/98 is 11/11/98. Now let's see how our short term pattern is doing. I've noticed that the top pattern on 8/25 is basically repeated to a larger scale from 8/25 to 8/27. You can now see the similarities to an even larger scale on the current chart. The similarities between C and D on both charts are too close to be ignored. The D rally, if it materializes, should be steeper than the C rally. I expect it to be another "straight up" rally at open on Monday. It could rally 100+ points, but should hit a wall around 8,550. At that point, it should be all down hill until we hit our first expected bounces around 8,100 and then 7,900. This could happen all on Monday, or take several days. A Tuesday bottom would make the most sense. It's interesting to notice that the major turning points have been at 1,000 increments. First, from 9,367 to 8,316 before a bounce(see intra-day chart above). Then, down to 7,400, and now up to 8,652. From here, we have just over 4,000 points to where I have projected the bottom of the crash. Possible support levels are 7,900, 7,400, 6,500, 4,500. Here are the charts.
October 21, 1998 - We have finally seen a definitive intra-day top yesterday at 8,652. Today's closing price SHOULD be the final closing high. Let's take a quick reality check on this rally. I thought the market was sick when it rallied 1,000+ points in just over 2 months. This rally, which started on Oct 8 at below 7,500 intra-day has moved up over 1,100 points in less than two weeks! This represents over One Trillion Dollars flowing into the market! People have broken the bank to feed this rally. To get the market up to a new high would take another Trillion Dollars. Does this money exist? NO. Deflation has been called money destruction. I can not think of a better way to destroy cash than to throw it into a sinking stock market. 'Nuff said, now on with the update. It shouldn't take a trained eye to see the similarities between today and 1929 on the charts above. The closing price chart is especially clear. The size of this rally only confirms that the crash will be the biggest in history. Although we have stuck to the 8/28 pattern at every turn, the volatility has increased and the timing has slowed to about 1/8 during the top. The pattern seems to slow down during rallies and tops, and speeds up during declines. The left shoulder decline ratio was about 1/3. I believe that once we get to the steeper declines the ratio will be closer to 1/1. This crash should be much faster than '29 once it gets started. Just look at the decline from 8/25 to 8/31. The Dow moved down 1,300 points in 5 days! Our volatility has been about triple that of the 1st step correction. This suggests about a 4,000 point decline to around 4,500 which is my target for the bottom of the crash. Tomorrow we could see one final rally with resistance around 8,600. The first slide should then begin and get us below 8,000 with resistance around 7,900. There should then be about a 200 point bounce which might last several days. It's interesting to note that the '29 pattern and the 8/28/98 pattern seem to be in agreement on this. The '29 shows resistance about 1/2 ways down to the previous low (7400). This puts the bounce around 8,000 also. Here are the charts.
October 19, 1998 - 11 year Anniversary of Black Monday - It's interesting to notice how the different indexes are diverging from eachother. Investors are moving from smaller stocks toward larger ones in a "flight to quality". This is why the DJIA has been out performing all of the other indexes and is a good 300 points above the previous high on 9/24. None of the other major indexes have made a new high since that date. The S&P 500 is the next best index which came within a few points of a new right shoulder high today. The Nasdaq is still well over 100 points below it's previous high. The "small-cap" stocks are doing even worse than the Nasdaq. The reason for this is similar to why high and low-quality bonds have diverged which, incidentally, is what bankrupted Long Term Capital Management. Investors are putting their money into "safer" investments. The DJIA contains the largest, most stable companies in the U.S. The next best thing are the Fortune 500 companies in the S&P 500. High-Tech stocks are deemed riskier, especially since many of them are linked to Asia in some way. The Nasdaq has already corrected 33.1% at the recent low. The rallies have been weak and the way that it is moving, there is no way in hell that it is going to make a new high any time soon. Basically, it has already gone below the "point of no return". The Dow is sort of the "last hope index". Once it starts to slip, then the whole market will crash.
We are still sticking to the 8/25 pattern, although it's time for a disclaimer. We might diverge from this pattern as soon as tomorrow. I've seen it happen several times where the market sticks to a previous pattern for several days and then diverges from it. While it's not a crystal ball, it's probably the next best thing. According to the chart the Dow should dip down Tuesday morning about 100 points and find support around 8,350. It should then bounce up and hover around 8,425 for most of the day before starting down again. This first correction should find support around 7,900. It makes sense for the bottom of the correction to be on Thursday morning with bounces on Thursday and Friday that lead to the Monday mini-crash. Here are the charts.
October 17, 1998 - I have a long update for you this time, after 5 weeks of ambiguity, the chart has now become clear. First, I would like to take a moment and reflect. Over five months ago I predicted the biggest crash ever would happen this year. At first, I was too bullish, expecting the Dow to top 10,000, then after the 19.3% 1st step correction, and with some help from Robert Prechter, I became too bearish on the right shoulder top. I should have stuck to my original 50% back-to-the-top number. Now, I can see clearly that this is the right shoulder top. The charts are practically screaming "THIS IS IT!". I warned you repeatedly of possible errors that I might make along the way. Specifically I have said that the market takes longer to complete patterns than I expect it to. On 8/31 I said that I expected the right shoulder rally to last 2-6 weeks, it has lasted 7 weeks. On Sept 12 I said "The rally should slowly curve upward and be at it's steepest climb just before the top. Look for a 100+ point up day on the Dow closing above 8,250." We've finally seen the pattern that I was waiting for. Look at the charts comparing '29 and now. Notice that today's market is both heavier and more volatile. In just over 1 week, the market has rallied up over 900 points intra-day! There are a couple of honest advisors out there that are saying that this rally is not sustainable, what an understatement! An interesting development is what is happening to the High-Tech stocks. At the 8/31 bottom, the Nasdaq was down 26% which was 30% lower than the Dow! The Nasdaq was the only index that made a new low on 10/8/98. Here's a 1 year chart showing the downside resistance line that was hit on that date.
The Nasdaq looks more similar to the DJIA of 1929 than any other index. If the Nasdaq continues to lose 30% more than the Dow, then it could be down as much as 80% at the bottom of the crash!! Needless to say, I suggest buying puts on Nasdaq or any other high-tech indexes right now.
I first became aware of the impending crash about a year and half ago. After that I started tracking all kinds of things -- CPI, PPI, GNP, GDP, Foreign markets, Bankruptcies, Personal & Public Debt, Trade Deficit, Precious Metals, etc. After a few months it became a real "information overload". Many of the things I was reading were conflicting, especially on Inflation Vs. Deflation. Then I made the mistake of watching market commentary on TV. It was as if all of these "professionals" were out to make things as complicated as possible so that nobody could see the big picture. I realized then that they are all a bunch of Spin-Doctors, making things appear as rosy as possible. It helps to picture them as used car salesmen, and what they are selling are stocks -- used stocks. Stocks that have been driven for 16 years and 200,000 miles. They tell you that the car will run for at least another 200,000 miles, and you believe them! You don't even check under the hood before buying the car! Nobody would buy a used car this way, so why does everybody buy used stocks this way? After realizing this I cut down on my info-intake. I focused solely on historical charts. It was in February that I first recognized exactly where we are in the '29 pattern. At that time, I realized that most of the market and economic information I was receiving was just background noise. The most important thing was the one thing that nobody was paying attention to -- the big picture. The big picture may be viewed simply by looking at a chart of the Dow Jones Industrial Average. There is nothing as honest as a chart. The chart is not trying to sell you used stocks, it is only trying to show you what has happened in the past. Virtually no one in 1929 knew that the market was going to crash, not the brokers, not the CEO's, nobody. In fact, many of the richest people committed suicide after losing everything in the crash. What I'm trying to tell you is that the social mood is now ready, it's the same as it was in '29. The stage is completely set, and the fat lady is getting ready to sing. Nobody is prepared for what is about to happen. Most brokers think that the crash has already happened. They are not trained to look at the big picture and see the larger cycles. They think that we had a 1.5 month correction that bottomed on 8/31 and the market can only go up from here! Their charts only go back 20 years! They don't think that it's pertinent to look at anything before 1980. You can not trust these people. They are clueless as to what is about to happen, it's beyond their scope of knowledge. They were clueless in '29, '74, '87 and during most other major tops. They have led herds of investors over cliffs many times before and this time will be no different. I have no reason to lie to you. They, on the other hand are paid to keep selling you "used stocks". What's worse is the general attitude of most investors right now. People have been lulled into sleep by the biggest bull market ever. One investor was recently quoted as saying "I'm not too concerned (with the 19.3% correction), the market ALWAYS comes back, doesn't it?" Actually, this statement is correct when taken in the right context. I do expect the market to "come back" in about 30-50 years. How many investors do you think can afford to stay in the market through a great depression? I guess we will find out what the phrase "investing for the long haul" really means. One of my readers has told me that I had not considered that the Federal Reserve has hundreds of billions of dollars to help stabilize the markets and that this would be enough to prevent a crash. This statement sounds like it came straight out of the mouth of a used stock salesman. Let's look at an example of how this worked during the '87 crash. I don't have the exact figure, but the total market valuation at the top in '87 was around $2 trillion. The total cost of "stabilizing" the market after the '87 crash was around $500 billion. This money did not prevent the '87 crash. Hundreds of billions of dollars was barely enough just to "stabilize" the economy. These are rough numbers, but the point is that it will cost 1/4 to 1/3 of the total market valuation in order just to "stabilize" it after a crash. The current total market valuation is around $12 trillion. So today, it would then take at least $3 trillion just to "stabilize" the economy after the crash. As was pointed out, the Fed only has a few hundred billion dollars to play with. I think the source was Nick Guarino, but I've heard that the Fed actually has less money now than they did in '87. So you see, the $3 Trillion that will be needed DOES NOT EXIST. What will happen? Not only will the crash not be prevented, but there will not be enough money to stabilize the economy afterwards, either. This will lead to the greater depression and a 5-6 year bear market that will leave most stocks worth less than 10% of their current value. Still think it can't happen? Just look at the charts, they have nothing to hide and no reason to lie.
Most people think that the market's movements are random and unpredictible. I have shown you that the market is made up of patterns that repeat over different cycles of time. Even with this knowledge there is no one who can even come close being right 100% of the time. There are two problems 1) Recognizing the correct pattern and once you have 2) determining the timing of the pattern. I think that most of you will agree with me that the long-term pattern from 1982 until now is basically the same as the pattern from 1921-1929. The main trouble I've been having is with 2) the timing. This is where the randomness comes in to the picture. It's especially difficult when you are taking a shorter term pattern and watching it unfold over a longer period of time. Every once in a while you come across a "perfect match", a pattern that matches exactly at every turning point. I think I might have stumbled across such a pattern -- you be the judge.
This time, instead of marking the turning points, I've put in some vertical lines dividing the days. Note that I'm not exactly sure where Friday ended on the pattern, Monday's activity will decide that. If we make a new intra-day high Monday, then it's in the right place, if not, then it needs to move to the right of the top just a bit. The rest of the days are just projections and are just there to give you an idea of what the next week might look like. The first major crash will probably be on Oct 26, with the big one 2 weeks later. Assuming that we will continue sticking to this pattern and have twice the volatility of this pattern, the short-term right shoulder correction should take the market below 7,900. There should then be about a 200 point bounce, then down to around 7,900 again, then a 150 point bounce, then the first crash of about 800 points bottoming around 7,200. This might take from 1 to 3 weeks to happen. Then there would be a 300 point bounce up to 7,500, another slide down to 6,900. Then a 250 point bounce to 7,150. Then the crash of 1,500 points down to 5,650. I don't think that this last number is even close, but this exercise is definitely worth some thought. Without this pattern, my timing expectations would be very similar. Basically, this market rallies up to 8 times slower than '29, but it consistently takes only 1.5 times longer to "correct". The '29 market took 18 days from right shoulder top to the crash. 18 X 1.5 = 27. Assuming that the intra-day top will be this Monday, Oct 19, then the crash should happen on Nov 16. The first crash can happen Oct 26 or Nov 2. I expect about a 300 point bounce once we get down to around 7,200, then a "mini-crash" with an intra-day bottom around 6,500. There should then be a large bounce of around 500 points before the slide continues. It is possible that we might have about a 300 point slide tomorrow to commemorate the 11 year anniversary of Black Monday. I would then expect to see a bottom of around 7,900 on Tuesday leading to a 200-300 point bounce rally. I will post as many updates as possible during these times of crisis. Stay tuned, things are just about to start getting interesting...
October 15, 1998 Emergency Update - First, I must apologize, again, for my short-term inaccuracy. Those of you holding puts feel my pain. It's not easy watching your investment lose 1/4 to 1/2 of it's value in one day! But cheer up, you will be rewarded for your patience, and your vision, because THE TOP IS NEAR! In fact, we might have already seen the intra-day top at 8347.76. Here are some facts. The last 3 times the breadth was 3.0 or above were also the same days that we had big rallies: 1) 9/8/98 (4.09) 380 point rally 2) 9/23/98 (3.0) 257 point rally & 3) today (3.7) 330 point rally. 1) was followed by a 2 day slide of over 400 points 2) was followed by a 6-day slide of over 500 points. Both 1) and 2) were short-term tops. Why should 3) be any different? If you would have bought a put at the end of the day during 1) or 2) the value of that put would have been worth 2-4 times as much in just a few days time. On 9/23 I said that "The top is near" and while it wasn't THE top it was A top. This time I think that it might actually be THE top. Today's movement also completes a long-term up-down-up corrective pattern and hits our upside resistance line (see intraday chart above). Today's end-of day rally also makes the charts for my scenario #1 made on Oct 14 look even more similar:
I have put labels on the turning points to make it easier to see. Basically, our current cycle is about 3-4 times longer than that of 8/28/98 with twice the volatility. If we continue at this pace, then the market will float until early next week, then start coming down sharply by the end of next week for the first crash to happen around Oct 26. If we compare the time cycles from now to '29 we see that it took 6 weeks from the top at 9338 to the bottom of the 1st step correction at 7539 versus 4 weeks in 1929. The right shoulder rally, however has taken 6 weeks (so far) this year, while only taking 1 week in '29. Using this as a guideline, and assuming that we see the top tomorrow, then it should take us about 1.5 times as long as '29 from the right shoulder top until the bottom of the crash. This would point to the bottom of the crash being about 4 weeks away or on November 16, 1998.
October 14, 1998 Wednesday "Hump Day" Update - I've got another theory of how the crash will play out. Basically, the double hump pattern is very similar to the one at the end of August just before the 1st step "mini-crash" on August 31. It's just a longer, bigger cycle this time. The following two 1-week (5-minute) charts show the 2nd hump which topped on 8/25/98 versus the current chart. Using this scenario, there are two possibilities. 1) The top will be formed tomorrow (Thursday). Tomorrows activity should look very similar to that on 8/25/98. The Dow should shoot straight up in the morning, then hit severe resistance around 8150, move sideways, then start coming down either late Thursday or on Friday. We would then be set up for a Monday 8/19/98 mini-crash.
The second scenario is that we have already seen the top of this hump on 10/12/98 which looks very similar to 8/25/98. If this is the case, then we should have one more rally tomorrow which shouldn't get above 8050, then the slide should begin. Both of these scenarios call for a mini-crash on Monday. I know that I've said this for the last two weeks, but maybe the third time will be the charm. Next Monday is the exact 11 year anniversary of the 1987 crash. I expect this crash to be bigger than the previous mini-crashes. There should be downside support around 6500 intra-day. That means that the market needs to move down almost 1500 points between now and Tuesday morning. If we do have a rally tomorrow, then it's an excellent opportunity to buy puts at a discount. The SPX (S&P500) November 800 put was trading just above $500 today and might get down to around $400 during a rally tomorrow.
October 12, 1998 - See, I told you that I would be wrong again. I neglected to quantify the possibility of a long-term "double-hump", and like so many patterns I've seen before in hind-site, it makes complete sense that it has happened this way. Basically, the crash or 2nd step correction is just a repeat of the 1st step correction on a larger scale. If you look at the intra-day chart, you see that the point that we are at today corresponds to the top of the 2nd hump on August 25, 1998. If you compare the time distances between the two humps from Aug 19-25 and Sept 24-Oct 12, then you see that our current cycle is about 3 times longer than that 1st step correction. If this correlation holds true, then we should break below 7400 next week, with the crash roughly 2 weeks after that. To confirm this scenario, the Dow should not get above 8182 intra-day. The market should then start coming down steeply by the end of this week. You can think of this 2nd hump as a selling opportunity if you still own stocks. Likewise, this can also be considered a put-buying opportunity.
October 10, 1998 - I know I've said this before, and I'll probably say it again, but don't be fooled by the strength of today's rally. The breadth at close was 1.55 which is pretty anemic for a rally of this size. I've included this week's 5-minute chart below and updated my labels that compare to the Fed meeting week chart below. I've seen this before. Basically, the pattern is the same, just on a greater scale. The one day bounce I had expected from the '29 chart has turned into a 6 day (so far) bounce this time. There are several things that tell me that we are at the top of this bounce and are ready for the first big crash. 1) The upside resistance lines in both charts above. 2) The completion of an up-down-up corrective bounce pattern. 3) The completion of a larger version of the Fed meeting pattern (see below charts). 4) The fact that the market has rallied over 400 points in 1.5 days with today's closing breadth at 1.55. 5) The knowledge that today's rally was credited to investor's hopes that the Fed will lower interest rates again on Monday after a weekend meeting (are these guys for real?). Here's the chart.
October 8, 1998 Mini-Black Thursday Night Update - Black Thursday was just before the crash in 1929. On that day the market fell 13% in the morning, then bounced almost all of the way back up to close at just 2% below the open. You have to look at the intra-day chart to be able to see why it was called "Black Thursday". I have dubbed today as "Mini-Black Thursday" because it has the same characteristics, just on a smaller scale. Today the Dow fell 3.5% and then bounced up almost all the way to close down just .1%. The Crash happened on the Monday following Black Thursday. So it follows that a Mini-Crash will happen Monday following today's Mini-Black Thursday. I know that I said there might be a Mini-Crash a week ago, but this time it's more of a certainty. This is a tricky market, it's like a bear in bull's clothing. Most well trained chartists would look at today's activity and think that it was a bottom due to the following factors: 1) We are "retesting the lows" of Aug 31. 2) The Volume was over 1.1 Billion, the 3rd largest ever, the other 2 larger days were the Tuesday bottoms after the 10/27/97 & 8/31/98 mini-crashes. 3) The strength of the rally at the end of the day. Aren't you glad you have me to tell you that they are all DEAD WRONG! We can dismiss 3) immediately because the rally is always at it's steepest point just before topping (see below charts). As to the volume, you ain't seen nothin' yet. The volume will continue to build until we see the big crash. I expect a new record in volume next Tuesday, and 2 Billion volume on the day after the crash. I think that 1) is the most compelling reason, but on closer inspection, this explains why we have been hovering here for 4 days now, because everyone thinks that this is the bottom. Investors of all sizes are putting it all on the line right now, using full leverege to the upside. The best that they have been able to muster is a "sideways" rally. This can only end in one way -- a severe crash. Yesterday, I noticed similarities in the 5-minute charts between now and the week of the Fed Meeting. I have put labels at all of the turning points to make it easier to see. As you can see, today's end of day bounce was no surprise to me.
Notice that the volatility is much greater this time. You can also see what should happen tomorrow. Last week, the Dow fell more than 600 points in the 2 days following this last bounce. This time, I expect the Dow to fall more than 800 points.
October 5, 1998 Monday Night Update - It looks like the dreaded "double hump" has appeared yet again. The market fell more than 200 points and then bounced up 150 points to -50. This fits my 2nd scenario I made Oct 2nd below. We should be pretty close to the top of the 2nd hump. The market could rally tomorrow morning, but should hit upside resistance around 7800. It's interesting to note that the Nasdaq continues to fall (almost 5% today!) rapidly even as the Dow hangs on above 7700. This reaffirms that we have indeed fallen off of the right shoulder and have "no bottom in sight", just bounces all the way down. The '29 charts have been an excellent guide in helping me to know what the market will do next, but they are not perfect. The only problem is that our current cycle is much longer than the '29 cycle and rallies (bounces) that only lasted one day in '29 could last up to 4 times longer this year. Also, intra-day events in '29 that we can't even see could happen over several days this time. I expect the decline to start again tomorrow or Wednesday. This decline should be steeper than the one last week. The Dow should go down another 500+ points to our resistance line around 7100. Once we reach that level, expect about a 400 point rally which could happen in one day or might be spread across several days in an up-down-up pattern.
October 4, 1998 Sunday Night Update - As I'm typing this both the Nikkei & Hang Seng are down over 300 points, both making new lows! It looks like I might just get the 600+ point mini-crash that I expected tomorrow. I've done some more number crunching and here's what I found. The decline in 1929 from the right shoulder to the first bounce was -7.43% with the bounce coming up 41.9% to the right shoulder top before starting the next slide. This corresponds to the decline from our right shoulder top Sept 24 until Friday morning of -7.97%. Our bounce on Friday was curiously stronger than it's '29 counterpart at 44.2% back to the right shoulder top. All of the '29 bounces from this point until the crash were much weaker than the 58% right shoulder bounce. Here are the '29 intra-day declines and bounces in order starting with tomorrow's expected mini-crash. The percentages refer to the right shoulder top. -12.32% bounce 41.7%, -24.1% bounce 39% (black thursday), -40.81% bounce 47.2% (crash). If we use these same percentages, then the next three weeks will look something like this: Dow declines to 7176 then bounces to 7576, declines to 6210 (Black Thursday) then bounces to 6979, crashes to 4843 then bounces to 6423, then aftershocks to around 4000. I've shown you this to prepare you for the many strong bounce rallies that come after the steep declines. It's going to be hard to not be scared in to selling too soon when the Dow rallies over 700 points in one day! You will need to focus on the charts and the big picture. Do not listen to the news media or what other people say, they do not even have a clue as to what is about to happen. You have the big picture, they do not. Trust in your own intelligence.
October 2, 1998 - It looks like my theory about the Fed Meeting being a turning point was correct. My comparative upside resistance lines in the above charts were also correct in letting us know when the right-shoulder had topped out. My prediction of a bounce today also panned out, although it was a bit bigger than I expected. I have been informed that the market will be open on Columbus Day, Oct 12, although I expect less volatility on this day due to the holiday. I have two scenarios for how the crash will play out from here. 1) We will have a mini-crash on Monday of about 600 points which will bring us down to our resistance line on the above chart around 7,100. We will then have about a 300 point bounce Tuesday, then an aftershock Thursday-Monday and another rally on Tuesday which should bring the dow up to around 7,400. Then about a 1,000 point slide Wed-Fri before the crash Monday Oct 19. OR 2) A 200 point sell-off Monday, then a 200 point rally Tuesday forming the now-common "double-hump" pattern. Then a slide Wed-Mon down to our resistance level of 7,100. Then a Tuesday bounce of about 200, then the Wed-Fri 1,000 point slide leading to the Monday Oct 19 Crash. Monday's activity will determine if either of these scenarios are correct. Either way, I'm looking for a sell-off Monday and a big bounce on Tuesday.
October 1, 1998 Thursday Night Update - Welcome to October! My favorite month of the year! I want to hear from you, especially if you are holding puts. Send mail to me at CrashReady@hotmail.com. I'm curious to find out how many of you are in this with me and what type of positions you are holding. Now, on with the update. The market has been going down in almost a straight line for 2 days now. This can not continue without a bounce soon. Using '29 as my guide, the bounces between now and the crash will be short and low. I'm expecting a pathetic bounce tomorrow of around 100 points. Monday could have a mini-crash which may bottom out around 7,000. We need almost a week of "sideways" rallying action to push the crash back to October 19. This could happen after the mini-crash, similar to the rally on Oct 21-22, 1929. Oct 12 is a holiday and I believe that the markets are closed on that day. I don't think that the crash will happen on a Tuesday, but I have been wrong before. If you are tired of waiting for me to update my intra-day chart, there is an excellent one available at MiningCo. Just click "Major Indexes", "Dow Jones Industrial Average", "$INDU".
September 29, 1998 Tuesday Night Update - The sell-off I was expecting on Monday never materialized and the market has moved sideways for 2 days. It was no surprise today when the Fed lowered interest rates by 25 points. That move had already been "priced" into the market. Once the market fails to rally tomorrow, then the slide should begin. I expect a 50-100 point loss on the Dow tomorrow and then for it to accelerate down from there. The 1-week chart of the Dow shows that it has not been able to break the intra-day high set last Thursday at 8,182, and each new high since then has been lower. This pattern is very similar to the one on August 24, just before the 1st step mini-crash on Aug 31. This second hump has failed to get above last weeks high, and should lead to a steep decline later this week. THIS IS YOUR LAST CHANCE TO SELL WITH THE DOW ABOVE 8,000! LIKEWISE, THIS IS YOUR LAST CHANCE TO BUY PUT OPTIONS AT A REASONABLE PRICE! I'm glad that's off my chest. Here's the chart.
September 27, 1998 Sunday Night Update - I was expecting maybe an Asian sell-off tonight, but foreign markets appear to be stable. The chart still points to a steep decline Monday, although I'm not sure what Wall Street will blame the decline on, possibly fear of more fund failures? It's amazing to watch events fall into place exactly where they need to be to keep the chart on course. I expect a decline tomorrow, then a rally starting Tuesday which will fail to reach last Wednesday's closing high of 8,154. The market should then turn down either Tuesday or Wednesday. This should mark the beginning of the biggest death spiral ever seen on Wall Street. I expect the same type of pattern as the '29 crash--Steep declines Wed-Mon with short bounces on Tuesday. If the market starts moving down quickly at the end of this week, then we could see the crash as early as Oct 12. Once we close below 7,400 on a Monday, then the crash should be the following Monday.
September 26, 1998 - First, I must apologize for my inaccuracy in telling you to wait until the Dow got above 8,200. It's hard to believe, but this market has been even more bearish than me. I'm too used to it having big bounces and floating too high. What I understand now is what most people will not understand, even after the crash -- The market has turned upside-down. We are in a bear market. Robert Prechter pointed this out very well. The corrections will be longer and deeper and the rallies will be shorter and lower. What I should have told you is to make your move at 8,150 or 38% of the way back up to the top. I hope my mistake has not caused you as much grief as it has caused me. I will make more objective observations in the future. Also note that my forecasts should become more accurate the closer we get to the crash.
The intra-day top on Thursday morning was 8,182 or 39.7% of the way back up. We are probably not going to see 8,182 again, the charts are very clear on this. Every chart I've looked at today from short to long-term, from DJIA to Nasdaq -- They all point to a severe decline very soon. Once the Dow gets below 7,400 then the crash is less than 2 weeks away, and there is no more support all the way down to around 4,500! The breadth figures during today's "bounce" rally remained negative, even with the Dow up 85 points! Closing breadth was .91. Basically, a put option on any stock index is a good investment right now. Likewise, this is the worst time in the past 200 years to be holding stocks. In Short, SELL ALL STOCKS NOW!!! AFTER NEXT WEEK, THE DOW WILL NOT BE ABOVE 8,000 AGAIN FOR AT LEAST 20 YEARS! I hope I've made myself clear on this.
September 23, 1998 Emergency Update! - The top is near. Don't be fooled by the apparrent strength of this rally. Remember, the market is usually at it's steepest climb just before the top. Today's closing price of 8,154 could be the highest closing price we're going to see. I'm amazed at the continuing volatility of this market -- it refuses to settle down! I guess that's why it's called a Mania. We saw a 257 point rally on the Dow today with breadth of 3.0. I don't think that we can trust this breadth number as an indicator of future strength due to the magnitude of the rally. I expect to see the Dow cross above 8,200 tomorrow (Thursday), and then come back down to close flat. I will make my move as soon as I see the Dow above 8,200, I suggest the same for you. I expect to see the intra-day top tomorrow or Friday. The market should then slip back a bit Monday before the FOMC meeting on Tuesday. I expect the slide to begin Tuesday or Wednesday. The funny thing is that it doesn't really matter if the Fed lowers interest rates or leaves them unchanged. The outcome will still be the same. I've seen it happen both ways in the past. 1) The Fed raises rates (bad news), the market is dissappointed and slides or 2) The Fed keeps rates the same (or lowers them) and then after failing to rally on this "good news" the market gets dissappointed and slides. Either way people can blame the Fed. The important thing to understand is that investors are ready to sell for many different reasons. Interest rates are not even on most investor's lists of reasons why they are selling. It only takes 10% of investors to "wake up and smell the coffee" and see that the future doesn't look so bright. Most of Asia is in a full-blown depression. Russia is also entering into hard times and the Communists are making a comeback. Profits are way down and stocks are way overpriced.
September 20, 1998 Sunday Night Update - I was concerned that we might have already reached the right shoulder top last Wednesday, so I ran some numbers and created another chart and found that Wednesday's intra-day high of 8102 was less than 36% of the way to the intra-day top. The intra-day numbers I ran point to the intra-day high being around 8218 - just 2 points off of my previous estimate that used only closing prices as a guide. In short, when you see the Dow above 8,200, make your move quickly as I don't expect it to stay there long.
September 20, 1998 - The market started to calm down a little until we had another aftershock Thursday due to foreign market sell-offs including the NIKKEI which closed at a 12 year low. I have changed my right shoulder top target due to 1) Robert Prechter (Elliot Wave International) and 2) the above chart. Bob has recently pointed out that the "bounce" in the middle of the 1st step correction only came up 38% of the way to the top before the 2nd step. In 1929 the same bounce was 50% and the shoulder also turned out to be 50%. Thus, my new upside target is 8,220, or 38% of the way back to the top at 9338. We should see this next week. The ideal scenario is for a smooth upward-curving rally of 300+ points during the next week. We could see some fallout on Monday, but there should be stiff downside resistance around the 7,650 level. All of these deep aftershocks are causing Put options to remain stubbornly high. The Dec 800 SPX last traded at 15 3/4 which is still a bit steep ($1,575). You might want to consider the Nov 800 SPX which expires Nov 20, plenty of time for the crash to take place. The Nov 800 last traded on Friday for 10 3/4. Another option is to trade the OEX or S&P100. The Nov 420 OEX put last traded at 9 3/4. All of these prices should be cut about in half as the market stabilizes and rallies smoothly through the 8,200 level. Look for an 80+ point rally with negative breadth. Breadth is the ratio of advancing stocks to declining stocks for a given day on the NYSE. This is one of the best short-term indicators at our disposal. These numbers can be found at Yahoo Finance Market News. At approximately 5:00 PM every day there is an article entitled "NYSE closing averages". Simply divide the number of Advancing issues by Decliners and you get the Breadth. Negative breadth is a number less than one. Friday's breadth was 1.7 (1892/1110). This is relatively good breadth for a flat day on the market. This usually denotes an underlying strength which should play out over the next several days. Likewise, negative breadth during a rally denotes weakness. I will post an emergency update when I feel that we have reached the top.
September 12, 1998 - We had a deep aftershock on Thursday, but then a big bounce on Friday which took us up to where we need to be at this time. The market should now start to stabilize and hover around the 7,800 level. Later next week a rally should start building and carry the Dow up to my right shoulder top target between 8,250 and 8,500. 45% of the way back up to the top is 8,350. I would suggest making your move when the Dow crosses above 8,350. Of course, we could have a higher right shoulder, but it would be short-lived and not affect our strategy enough to worry about. The rally should last at least through Sept. 22. My calendar has a very ominous looking "Fall Begins" on the 22nd. Don't forget that the Fed meets on the 29th. I expect the right shoulder to have topped on or before that date. The market should start to calm down over the next week as we enter what I call "the calm before the storm". The rally should slowly curve upward and be at it's steepest climb just before the top. Look for a 100+ point up day on the Dow closing above 8,250. This will probably be the safest time to make your move. Please notice that I have drawn trend lines on the chart above from the top to the right shoulder of both '29 and '98. This shows the similarities between '29 and now, a striking resemblance indeed. I would start getting nervous as soon as we have reached that line. You can see what happened after it was reached in '29.
Put options are expensive right now, which is understandable given the previous few weeks of market activity. The value of options are heavily affected by short-term market sentiment. The S&P500 December 800 PUT last traded on Friday at $1,900, a bit steep. This price will be cut in half as the market stabilizes and the dow crosses above 8,000 next week. It should then cut in half again as the market starts rallying steeply to the right shoulder top around 8,400. Please note that the price will probably double on the first big down day after that top. Therefore, it is important that you buy while the market is still rallying. I will post an emergency update when I feel that we are getting close to the right-shoulder top. I expect the S&P to bottom out around 600, so an 800 put would definitely do the trick. At the bottom of the mini-crash on 8/31/98 the Dec 800 was trading for more than $6,000 with the S&P500 at 960! It was 160 points out of the money, but investors were paying $5,000 in premiums due to the steep decline. You can easily multiply this demand by 3 when the big crash comes, and let's say that you sell this option (Dec 800 put) with the S&P at 650 on the Monday of the crash, just before closing time. It could easily be worth $30,000+ ($15,000 real value + $15,000 demand).
One of my readers has asked me where to get intra-day charts. Some of the best charts can be found at Excite, just click on 'Dow' and then click 'Charts'. I use Yahoo Finance as my home page because they have all the major indexes that are updated several times per minute! Yahoo also has charts & market news which can be usefull as a contrarian indicator. Some of you have asked me what my opinion is about Bonds and inflation. I haven't had a clear picture of what to think until recently, here it is.
September 5, 1998 - Welcome to the "right-shoulder". Many investors are now experiencing what I call the "right-shoulder psychology". This is characterized by the "wait and see" approach by the majority of investors. The next largest group of investors are "buying on the dips". Last but not least, a small percentage of investors (say 10%) are waiting for a clean exit. I can almost hear them thinking.. "As soon as my stock gets half way up to where it was, then I'm selling!". This group of investors is like a ticking time bomb. Please know that it only takes a small percentage of the total investor population to crash the stock market. The combination of motivated sellers and the lack of buyers is all that is needed. So 10% will get their money out and the other 90% will take a bath and lose 50% of their money or more. To put this in perspective, the total valuation of all stocks at the top of this bubble was around $13 Trillion. After the crash it will be worth around $6.5 Trillion. Over $6 Trillion of perceived wealth will be lost in just a few weeks time!
The bounce we had on Tuesday was a bit anemic and the aftershock was pretty severe. Here's the chart:
This chart is very similar to the one showing the Oct 27, 1997 mini crash. I expect the dynamics of the big crash to be similar to this one, just increase the volatility by a factor of 4.
It's interesting to note that the last two major corrections (Oct 27, '97 & Aug 31, '98) of 13.3% & 19.3% are 1.3 times their corresponding 1929 corrections of 10.3% & 14.7%. If we apply this to the crash, then we will be down roughly 51% at the bottom close of the crash and down 62% at the bottom of the aftershock. It's hard to say if the aftershock is going to be lower than the crash like it was in '29. The more I learn, the more I lean toward a lower aftershock.
I have a theory for when the top of the right shoulder will be. Here's the scenario. I expect the right shoulder to top out about three weeks after the Aug 31 bottom, or around Sept. 21. Alan Greenspan and the FOMC meet on Tuesday, Sept 29. I have been watching the Fed for over a year now. Sometimes their meetings happen at market turning points. Many people think that the FOMC will lower interest rates at this meeting to help shore up the equity markets. They will be dissappointed when the Fed keeps interest rates the same and start selling on Sept 29 or 30. The market will then start it's steepest slide ever. Less than three weeks later is Black Monday, Oct 19, 1998. If you are wanting to sell your stocks, wait until the Dow gets above 8,100, then get the hell out. The same timing applies for those of you who want to short this market. If you want to get a little closer to the top then wait for the rally to start getting steep and then make your move. I don't expect the Dow to close above 8,500.
August 31, 1998 Emergency Update - DON'T PANIC! Historically speaking, it is not physically possible for this market to go down any further without a "right shoulder". Today's closing price of 7539.07 is the bottom of the 1st step correction which measures in at a record -19.3%. This market broke all of the records on the way up, so it makes sense that it will break more records on the way down. We should see a rally tomorrow of at least 300 points. I would recommend that you buy your put(s) (or start shorting the market) when the Dow is 40% of the way back to the top or at 8,250. We might not make it much above that. If this "right shoulder correction" is any indication of the size of the crash that's coming, then we could see the bottom around 60% below the all time high of 9,337 or 3,750 on the Dow! I expect the right shoulder rally to start tomorrow and last from 2-6 weeks. The crash will be about 2 weeks after that top. This puts the crash as early as September 28, or as late as October 26, 1998.
August 30, 1998 - From Russia with love... My prediction of 10,000 was too optimistic and my last few short-term updates have been wrong. The short term movements of this market have proven once again to be hard to predict. I have made mistakes before and will make more in the future. The important thing to note now is that we are on track for an October Crash. We now have plenty of time for the right shoulder to form during September-October. Because this is a longer cycle then that of the '20's, the timing is now perfect for a repeat of Black Monday on October 19. The '97 mini-crash took 12 weeks from top to bottom. If this crash takes 12 weeks from the top on July 17, then the bottom will be October 12, but I think we can add one more week to the right shoulder for good luck making it 13 weeks. The current correction now qualifies as a "right shoulder" correction or a "first step back" correction at -13.8%. I think that the all time high has been put in at 9337.97. We could see a "mini-crash" on Monday, although there should be downside resistance around 7,500. I expect the bottom close for this correction to be 15-20% below the high or 7,500-7,950. The Dow should now bounce around 8,000 for several weeks and then start the right shoulder rally which should carry us above 8,600. Watch for a big bounce next week. 45% of the way up from Friday's close of 8051.68 to the top at 9337.97 is 8693, but I would start getting nervous at around 8,600. This is a very bearish looking top and the market seems to be getting very heavy. We might only see a 40% bounce before the big one. Remember, this is only a first step back. The first step back in '29 of -14.7% was less than 1/3 of the way to the bottom.
August 23, 1998 - Last week's rally was on cue and then the longer term aftershock bottomed on Friday. The next few weeks should be nothing but upside. To the moon (10,000), and then bust!
August 15, 1998 - I'm pretty sure that Tuesday was the final bottom of the 16 week correction which started on April 23. The sell-off late Friday qualifies as an "aftershock". Here is the intra-day chart for the week.
Notice the steep sell-off on Tuesday morning. This is the steepest decline of this entire 16 week correction which is one of the reasons I think it is the short term bottom. It's also interesting to note that this correction from top to bottom is -9.8% which is almost exactly double the '29 correction of -5% (see above charts). This "left shoulder" correction took more than 3 times longer than the one in '29. If the market continues lumbering along at this pace, then we will not see the crash until early 1999. Also note that this recent 9.8% correction is the 2nd step back in a 16 week long "sideways" correction and does not qualify as a "right shoulder" correction. It's interesting how the market is becoming both more volatile and more similar to the '29 market. The market is becoming extremely unstable. This crash can't wait until October 1999. I expect to see the bargain hunters out in force on Monday and all of next week. The market should now start it's steepest rally yet, a 20% rally that will take the Dow above 10,000. If we are to have an October crash, then the market needs to be around 10,000 by the end of September.
August 6, 1998 - All of the calculations that I am running point to the Dow rallying another 20% from the recent low to the final top. I think I was a bit to optimistic for the Dow with my previous estimate. I now think that it will top out around 10,200. The crash does not have to happen in October. If there's one thing that I've learned from today's market it's that it almost always takes longer for patterns to complete than I think it will. The market might not crash until November or later. Japan's stock market, the NIKKEI, didn't crash until January of 1990, although the Japanese market works a little bit differently than ours.
My best estimate at this point is for the Dow to top out mid-September around 10,200, then correct roughly 12% (9,000), then rally back 50% (9,600), then crash down to about 5,000 on the last Monday in October or in November.
It took me a while to find all of the closing prices for the DJIA this century and many hours cleaning up the data. The fruits of my labor are now available for you to download for free. This file is in ascii comma delimited format which should be easily imported into any spreadsheet program.