A Stock Market Like Mid-Year 1929 With Tories Galore to Boot ~ The Risk Averse Alert

Monday, August 18, 2008

A Stock Market Like Mid-Year 1929 With Tories Galore to Boot

The other day I linked to a Bloomberg story reporting management at J.P Morgan / Chase fessing up to problems the firm is facing. The outlook was not at all sparky. In fact, it was downright gloomy. Indeed, there is every reason to believe Still More Gnashing of Teeth Before Market Melt Up Begins.

However, something occurred to me. When the market reaches an important top the general outlook is blue skies and sunny days for as far as the eye can see. Similarly, the future typically portends nothing but stormy conditions just as the market makes a significant bottom.

Now, far be it to suggest fundamental frailties embedded within our contemporary financial arrangement suddenly will be resolved. In fact, the market's projected melt-up probably will be nothing more than a liquidity-driven short squeeze.

This should come as little wonder given how present circumstance might be likened to the first half of 1929, when stresses brought about by an imbalanced financial environment were beginning to take their toll. Eventually, by hook and by crook, these were temporarily resolved and a melt-up unfolded, leading to a top of historic proportions.

DJIA weekly

The market might be setting up similarly. However, I am only making a technical observation here supporting the present period's fundamental likeness to the 1929 investment environment. Just as some substantive shift in the underlying financial climate then unavoidably led to a stock market breakdown, the same appears to be occurring now.

Once again in our time every conceivable effort is being made to sustain the unsustainable. For a brief time, too, the fixes might appear to be working. However, massive leverage built upon a shrinking physical economy have long been the recipe for disaster. Enter, then, my outlook for a prospective decline to the vicinity of Dow 3600 sometime over the next several years.

There is plenty of time to think more about developments that might precipitate during the coming financial storm. All I know is history cannot be easily erased. Reasonable, workable solutions to difficult problems have precedent. And there is nothing to fear but fear itself.

So, here and now the evidence suggests the stock market is not far from a bottom from which a melt-up might commence, much as occurred during the summer of 1929. Let's have a closer look...

OEX weekly

Since January '08 the S&P 100 has twice moved to a new low for the year and in both instances an RSI divergence was registered. I expect this to occur once again as the S&P 100 embarks on its final decline into bottom.

With anticipation toward the market's subsequent melt-up ... weekly RSI could register a buy-side reading stronger than any over the past ten years ... as the S&P 100 extends beyond its 2007 peak. This would confirm my present Elliott Wave-based view suggesting the market currently is correcting its 1982-2000 advance ... setting up for a steep decline to the area major indexes traded during 1994 and a subsequent 1000% gain following that. Of course, nothing is set in stone.


So, what other technical conditions might develop as the S&P 100 proceeds to form its bottom? Well, RSI and MACD divergences ... coincident with an S&P 100 falling on diminishing volume ... would be good.

Truth is, though, several possible scenarios might develop here...

One thing potentially supportive of a pending melt-up following the S&P 100's yet-to-be-seen bottom would result in both RSI and MACD exceeding respective May '08 peaks sometime during the market's present bounce. This would suggest underlying strength is building ... and provide further basis for anticipating positive technical divergences once the S&P 100 finally reaches its bottom.


You can see why the current bounce probably has not completed. Weakening underlying conditions one should expect at a top have yet to fully form. Although these are not necessarily a precondition for a reversal in trend, the expected turn lower to ultimate bottom will more likely unfold when RSI and MACD divergences are registered as the S&P 100 reaches the top of its present bounce from the July 15, 2008 low.

OEX 5-min

The next leg up in the S&P 100 appears nearer to forming. Today's decline below last Wednesday's low (8.13.08) was confirmed by 5-minute RSI ... which, itself, has now begun to diverge. However, further price-RSI divergence probably needs to develop before the S&P 100 turns higher and moves closer to completing its bounce off July's low.

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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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