The Long Crisis

Posts Tagged ‘stock market crash’

For the last several weeks we’ve been very concerned that all the major indexes are in “thin air” and have exceeded some key Fibonacci retracement levels. But certainly, the poor price action over the past few days, with the Dow closing Friday at 10120. 26, down 115. 75 points, is a strong indication that the concerns are justified.

This new short video explores that and looks at a key Japanese candlestick formation that could really make a difference and be the first clue in the demise of the Dow. The fact that early in the trading day the Dow rallied over 100 points on news that GDP for the fourth quarter of 2009 expanded at a 5.7% rate and then reversed in the afternoon to finish about 53 points lower is certainly bearish price action.

In the video I’ll also show and share with you a specific number to look for in February. Should this level be broken, then it will signal a major reversal to the downside for the Dow. We are not talking about a minor correction here, but a complete trend reversal, one that will be very violent and catch many traders by surprise.

Watch the video you see if it all makes sense to you. As always our videos are free to watch and there is no need to register. Bear Market Wave 3 Video Enjoy the video and let us know what you think on our blog.

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In an interview with Reuters, Robert Prechter, president of research company Elliott Wave International in Gainesville, Georgia and known for predicting the 1987 stock market crash, said that the next leg of the bear market in stocks has probably begun. Prechter further says that stocks as well as gold and corporate bonds are likely to slide as the U.S. economy suffers long-term weakness.

For investors in stocks this is “the last chance to get out with the Dow in quintuple digits,” Prechter added. Prechter is forecasting a long-term deflationary environment for the US economy which may last until 2014 to 2015. Prechter is a highly regarded financial analyst and is considered a leading authority in the application of Elliott Wave theory.

According to Prechter there is a very good probability that the highs have been seen in the Dow Jones industrial averages and that the rally from the lows from March 2009, even though the rally retraced about 53% of the losses from the all-time high, was merely a rally in a long-term bear market. Prechter compares the advance to one that occurred in 1931 in 1932 that advanced an almost identical 52.9% before the market collapsed to new lows.

Prechter is forecasting that wave three of the bear market has probably started and before the bear market has been completed the March lows of March 2009 will be taken out. Wave three is the wave that travels the furtherest in the shortest amount of time. Many traders will be taken completely off guard as the wave begins and will suffer heavy losses as the wave progresses.

Prechter is forecasting that the likely bear move will be violent and extremely severe. According to Elliott wave theory, as explained by Prechter, the current bear market involves a super bear cycle and will be the most severe for at least the past 200 years. The ensuing wave of deflation will take no prisoners, and will decimate stocks, bonds, commodities, as well as real estate. In fact, the deflation will be so severe that he thinks the only investment that makes sense as an asset class will be cash.

In regard to the US dollar, Prechter forecast that a deflationary period of depression will bring strength to the currency. The reason for this is that in a depression bankruptcies, structured settlements, foreclosures, and debt liquidation, create losses and take dollars out of circulation. For example, if a real estate project worth $100 million goes into foreclosure and eventually sales for $50 million dollars, the difference of $50 million is simply lost.

The money does not appear in anyone else’s account, it has just disappeared into money heaven. The fact that a depression causes dollar destruction means that the remaining dollars have more value. In a depression, cash becomes king. Those who have cash find that their cash becomes more valuable as they can purchase just about everything at lower prices.

While it is far too early to say with certainty that Robert Prechter is once again right with his forecast the price action of the last several days strongly suggest that he must be taken seriously. For the stock market to fall about 555 points on the Dow, only to rally today by 23 lousy points, is extremely bearish price action. Over the past two weeks weakness in the gold market and commodities in general have correlated with renewed strength in the dollar. All of this price action is in line with Prechter’s forecast.

If Robert Prechter is correct about this being wave three in a bear stock market the next few weeks, and indeed all of 2010, will likely be an extremely painful period for stock market bulls. A wave 3 in a bear market typically will have sharp sell-offs followed by weak rallies, each followed by another sharp sell-off, until the wave is eventually completed. The price action of the past four trading days will conform to that pattern if another sharp sell-off takes place.

The price pattern of the next few days will be critical. Any further sharp brutal sell-off would be fair warning that we are in a wave three of a bear market. If Prechter is correct about this being the beginning of a bear super cycle the year 2010 will be one long remembered by stock market traders. Unfortunately, it will only be short sellers that will be able to talk about 2010 with a smile on their faces. Those who are long stocks during such a cycle will probably never want to talk about stocks again.

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Robert Prechter is the founder and editor of the Elliott Wave Financial Forecast and over the past 40 years or so has earned a reputation as a premier financial analyst. One of Robert’s most famous forecasts was his warning in 1987 that a stock market crash would soon take place. Of course, he was right and the market lost about 22% of its value in just a few days before rebounding.

Less than two weeks ago, Robert Prechter issued a rare emergency warning that the stock market was setting up for what he calls a super cycle crash. According to Prechter, super cycle crashes are rare events and the possibility that one could occur in 2010 must be taken very seriously. In a super cycle crash the direction of the market reverses in a most violent and severe manner. As is usually the case with any reversal in the stock market, the reversal takes place without warning and occurs when most stock market analysts and traders are at their most bullish and complacent.

Over the last two days the market has reversed from the high reached since the March 2009 low and quickly shed over 300 points on the Dow Jones industrial averages. The sudden losses in stocks have been accompanied by a surge in the strength of the US dollar, a fast drop in gold of over $40 an ounce, silver selling off by over one dollar per ounce, and a general rout in the price of commodities.

Robert Prechter has not only warned about an impending super cycle reversal in the stock market, but also about an intense long term deflationary wave that would affect not only stocks and commodities but all sorts of physical products, such as housing and commercial real estate.

While it is still too early to tell if the bear market rally in the stock market has been completed and a new severe down leg is getting under way, the price action of the last two trading days certainly suggest that at a minimum a long anticipated correction is underway. Should the move be merely a correction I would expect that the down move from the recent high would be on the order of 10 to 20%. Should the sudden drop be the beginning of Robert Prechter’s super cycle price 2010 will be a very rough year in the stock market indeed.

The next few trading days should give us a very good idea as to just how severe the drop may be. It is interesting that according to Robert Prechter’s technical indicators the stock market was ready for a severe sell-off just as president Obama felt that he was forced to play to the populist crowd due to the shocking results of the Massachusetts Senate seat election. He quickly decided to take a tougher stance against the big banks and their speculative trading practices. President Obama even brought Paul Volker out of the shadows to announce that there would be new rules and regulations designed to curb the speculative trading activities of banks.

Paul Volker, the chairman of the Federal Reserve Bank during president Jimmy Carter’s administration, is widely regarded as the man who broke the inflationary spiral of the late 1970s and early 1980s by raising interest rates. Paul Volker has been pushing for tougher regulations on the banks for some time but apparently was outgunned, until very recently, by Larry Summers and Timothy Geithner, who seem to be the best of friends with the banksters. It would be ironic, indeed, if new tough banking regulations proposed by president Obama, as suggested by Paul Volker, are the trigger for a super cycle stock market crash.

Putting the brakes to the bankers disgraceful and immoral activities may morally be the correct thing to do, and will certainly play well to disgusted and angry taxpayers, but a sharp drop in the stock market will further damage the prospects for an economic recovery, which will lead to even more frustration and anger by the American taxpayer. Really, there is no painless way out of the economic dilemma that several administrations, going back to at least president Reagan, have created for the United States of America.

Stay tuned to see if Robert Prechter is correct about a bearish rare super cycle kicking in. If he is correct, we won’t have long to wait. A super cycle move down will be severe enough to get our full attention.

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