Stock Market Crash?

Since my last Special Alert whichwas written at the start of May with the theme of SELL IN MAY AND GO AWAY, Ihave had a lot of calls and e-mails asking if I had written another since. Ihad not because I saw no reason to veer from the message in the prior Alert.The early May Alert was probably the most technical Alert I have written and Iconcentrated on the monthly charts. That is not something I usually do.Typically, I only refer to a monthly chart when I think that ?bigger picture?viewpoint is seriously worthwhile. My focus was almost exclusively on themonthly charts because I believe the April 26th high was the orthodox top forthe recent ?reprieve rally? that began with the March 2009 low. When I wentover my monthly charts and saw the amazing convergences in the various charts,I was quite surprised. The chart below is from that Alert and sums up all ofthose charts with the highlighted target range – which had already been reachedat the end of April. Look at the same updated chart that follows – a great dealhas happened since May. The S&P was above 1200 when I was writing thatAlert. At today?s low it was just under 1011 – a drop of almost 16%. A numberof technical levels have been violated.

The lower channel line (lower brown line) from the prior chart has beenbroken. Just prior to its break, the uptrend line (light blue line) was broken.Next, a down channel (red lines) has been established. In addition, an argumentcan be made that a head and shoulders pattern is being made and that itprojects all the way down to the 61.8% Fibonacci retracement line (the lowerbrown horizontal line). Elliott Wave analysts can make the argument that we arein wave 3 to the downside (which is the wave associated with aggressivedownside moves). It is common knowledge among technical analysts that crashescome from lows, not highs. We are set up potentially for a crash ? that cannotbe ruled out. Let?s look at a daily chart:

The dailychart is also biased to the bearish side. The market is clearly in a downchannel and has broken below the lower blue channel line that has confinedprices since the November 2008 low (with the obvious exception of the finalbear thrust culminating in the March 2009 low). Otherwise, it has been anexceptional price channel. It was initially broken on May 25th but quickly found support at the 1040 level. It again broke the channelleading to the June 8th low at the 1042 level. Two days ago the 1040level was broken. This was the ?line in the sand? and it has been penetrated tothe downside. With respect to Dow Theory, both the Dow Jones Industrials andthe Dow Jones Transports made new closing lows. This, of course, is a verynegative sign as well as a downside confirmation. So, with all this negativity,is there anything bullish occurring? I believe there is ? at least thepotential exists. The market is finally short term oversold. The TRIN readingshave been extreme and VIX numbers have set up a buy signal. A turn up in pricesat this level produces a divergent buy signal. The chart below shows the dailyS&P bars as well as the daily closing prices (in white).

The redtrend lines are based on the daily bars and the white trend lines are based onthe daily closing prices. The broad upward channel and the recent down channelare clearly shown. The purpose of the chart, however, is to show theconvergence of lines under current prices. This provides support in both priceand time. Near term, if the market decides to test lower prices, the 990 levelwould be a good bet to hold. Otherwise, we may have already begun a turn to theupside.

Thefollowing chart shows two yellow trend lines that are based off a lower speedresistance line. The lower line adds to the support argument near currentprices. The rest of the chart shows my Elliott Wave count from the late Aprilhigh. I view the recent thrust to the June 21st high tobe an A wave and this current decline to be a B wave. That implies a C waverally. If this count is correct, I have no idea where the C wave will take us.In a best case scenario, you could get up to prices above the recent A wave. Idrew in my expectations under such a scenario.

My majorturning points for this year were May and August. With my last Alert it wasapparent that the late April top would be significant and, in my view, is theorthodox top of this reprieve rally from March 2009. I have had August 2010 asa significant date in my longer term work for about two years. I see no reasonto change that expectation. Since my May expectation came in a bit early, I amputting my ?early warning date? for August in the July 26th general time frame (based on the April high). The obvious caveat at thislate stage of the game is to constantly be on the lookout for a crash or atleast the return of a bearish trend. I expect to have my Part II of theSequence of Events in the Cycle completed soon and it will contain some seriouswarnings.

Garrett Jones can be contacted by Email

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