A New Re-View on a Stock Market Mini-Collapse ~ The Risk Averse Alert

Saturday, May 17, 2008

A New Re-View on a Stock Market Mini-Collapse

Only a month ago I was arguing March 17, 2008 probably marked bottom to the stock market's multi-month decline. Now I think differently. This simply is the way the game goes. Nothing is set in stone.

Truth is I did not see the evidence as I do now. It was right there in front of my eyes, but I did not see it.

Here's the deal. Sometimes — no, often times — the evidence needs to stew. You need time's passage for its gravity to take hold. You simply must be careful not to come to quick conclusions. Let things over the near-term play out before casting judgment on what strong hands are doing.

Seeing no real conviction in the volume of shares traded on the NYSE since the March 17, 2008 low, I began looking at the situation differently. That's how I began to suspect the March 17, 2008 low might not be bottom. Nothing has given me cause to change this attitude.

Indeed, I have been yacking up a mini-collapse ... a sharp meltdown ... using what might seem panic-stricken language. Not wanting to create too much confusion, I thought I should revisit the big picture. I am, after all, still expecting the stock market eventually to melt up.

On April 19, 2008 I wrote a piece titled, "Now See the Stock Market Near the Edge Grasshopper." There I put forward a view showing how indexes for the two major U.S. stock exchanges — the NYSE and NASDAQ — each were trading very near their respective long-term rising trend lines. My argument then was that, with long-term support so close nearby, the stock market might likely find legs and be on the verge of commencing its melt-up.

True as it is both these indexes presently are trading not far from what might be considered a precipice, a 20% or so move lower would not necessarily put the stock market at risk of going into free-fall. In fact, I think we can suppose there's a vested interest with power to prevent this from happening ... what with $3.5 trillion sitting in money market accounts.

Indeed, a sharp sell-off from here might be an incredibly motivating factor driving buying support. If you think about it, a mini-collapse sets up nicely for a melt-up to follow, given a vested interest with the cash to back up its desire that the market not fall apart.

Speaking of motivation ... this is precisely what persistently low volume of trading on the NYSE indicates is lacking. That's why I think the time is now for a kick in the pants.

NYSE weekly

Alright, I have said this a number of times before, so forgive me for being repetitive. Trend lines do not mean a whole lot to me. In fact, I consider them entirely arbitrary. However, in this instance the long-term trend line is worth a look because I really do have good reason to suppose a stock market melt-up is still in store.

You can read the "Recent Analysis Supporting My View for a Stock Market Melt-Up" found listed over to the left. There's something else, though, driving my optimism.

NASDAQ weekly

I will spare you the details behind the reason why I believe the NASDAQ Composite is slated to strongly rise upward to its Y2K high sometime over the months ahead. You guessed it. It's entirely an Elliott wave thing. As for those who might scoff at this, I am not here to persuade you. I would, however, invite you to watch. You just might be amazed.

Quite simply, my outlook for a NASDAQ melt-up is on condition the index not fall below its low set in 2002. So, the trend line I have drawn becomes "important" only for this reason. As you can see, there's a lot of room between the NASDAQ's rising trend line and its 2002 low.

The long-term trend lines drawn on both charts above could just as easily be taken out as they could provide support during the pending mini-meltdown I am forecasting. The reason I wanted to present these two charts again today simply is to show you that a sharp decline of 20% would only bring both indexes right down to them.

I indicated yesterday my belief the moment of truth has arrived. If I am correct about this, the selling in store probably will come sweeping down upon the stock market like an avalanche. And it should not last all that long — probably only a few short weeks. That's why I took you back to the crash of October 1987, and briefly showed you how the present period bears a marked resemblance to conditions then, just before all Hades broke loose.

Now, the crisis of confidence I alluded to yesterday should be the driving force behind this pending mini-collapse. Again, that's the message in the volume of shares traded on the NYSE since the March 17, 2008 low.

What's more, the fundamental vulnerability breeding this crisis will survive the stock market's subsequent melt-up, too. Why wouldn't it? It has been building for years! We are, in fact, a broke down nation addicted to debt. Plainly, we lack the productive capacity to service all our liabilities to maturity. Hence, without a far-reaching, fundamental reorganization of the present arrangement, we can only expect financial vulnerabilities to grow.

And that is why I believe we will see Dow 3600 in just a few short years...

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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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