CRASH

Crash!?

Human nature is a wonderful unfolding drama. In 1929, the time from the last chance to get out to the crash was 55 days. In 1987, 55 days was the Saturday before Black Monday. Now in 2008, the last top was Aug 11 and the first crash was last Monday, Oct 6 - 55 days to the Sunday before. Does it just take about that long for the point of recognition to sink in? Amazing that each time the next trading day after 55 days would be the crash (which can unfold over several days, as in 1929, and 2008).

Who woulda thunk we would relive 1987? I remember being in London, and hearing that the US market was down 200 odd pints, then was coming back; and at the end was down "5 0 8". We thought he meant 5.08. and it had come back. We found out later he meant the incomprehensible drop of 500 points off Dow2200. This would be a 2000 point drop tomorrow. It now seems thinkable. Could it happen?

Look at this chart. Wanna catch the bottom tomorrow? Ever caught a falling knife?



Neely's service has vigorously kept us posted on his thinking, and he has a cell phone alert tomorrow if need be. He put put a crash warning tonight. Obligatory disclaimers: crashes are rare events, impossible to predict, blah blah. The STU merely stated that "third wave declines could go anywhere." Let me make this simple: we already have crashed. Question is how low will it go? Let's explore stopping points below the fold.


Some optimistics on the Street were floating "Dow 8500" as a support level. When the market rose from Mar03 to Jan04, it didn't stop much anywhere, including at 8500, and never got back to that level until now. Hard to see why this is anything but wishful thinking. We hover at that level, albeit futures have already gone below it in the aftermarket (Dow8344). So I guess we shall test 8500 in the first few minutes of trading. Swooosh! On to the next level.

The most logical support level is the triple bottom on Jul02 / Oct02 / Mar03 around DOW7400 and SP777. Intraday, the Dow got down close to 7100. So a range of 7100-7400, or SP 777-800, really is a support level. And a very important one. Prechter first opined that the ~16 year period of correction from 1998/2000 to 2014/2017 would break as a triangle. Neely also shares this view, and I too have been expecting a triangle. The bottom of that triangle would be this 7200 +/- level, and we would expect to hit it three times: in 2002, 2010, and in the final downtick in 2014-17.

If we break it significantly, the triangle is out. Neely thinks we *may* breach it temporarily by as far down as SP650 (an irrational exuberance to the downside) before continuing on the triangle. I had thought we would end above Dow7200, closer to 9500; have a huge Election Rally into May 2009 that could run up as far as SP1325 and Dow14K before the Summer of Disillusionment sets in, and then crumble back down to Dow7200 in 2010. This would constitute wave C of the 14-year ABCDE triangle, and would break as a flat with A = C. While that specific scenario is now out, if we hold above Dow7200, the Election Rally and subsequent end of C in 2010 is still a probable scenario.

But if we break through, the pattern shifts off the triangle to a flat: a three-wave down into Mar03, followed by a three-wave up to Oct07 (it being ok for a B wave of a flat to go to new highs), and now a five-way down to complete the correction. As a flat, C often = A, but we have already had a deeper and faster C than the A. Next most likely is C = 1.6 x A. The A wave fell 4500 Dow points and 750 SP points, not even; the SP had more tech stocks. So perhaps the C wave will even the two indicies out, with the Dow falling 1.6x A and the SP 1x A, pointing to Dow falling 7200 pts (ending at around Dow7200) and the SP dropping 750 pts (ending around 800). Ok, again a confluence around the expected level, not lower.

If we go a lot lower, both the flat and the trinagle would fail, and the pattern would look like a zigzag. Let us hope not! We had a double zig zag from 1966-1982, and we should not have one again under the rule of alternation, at least not if we we count the 66-82 period as 50W2 and our current period as 50W4. We would still have the audacity in the middle of fear and despair to expect a 50W5 robust bull market ahead after the end of 50W4 in 2014-2017. But if this breaks as a zig zag, then we have to reconsider whether Prechter has been right all along to say this is not a mere 14 year correction before another bull run, but a much deeper correction off the whole rise from 1789. Whew! End of the American Century and all that. Let's hope not.

For a variety of reason I expect us to bottom around Dow7200 / SP800. It might be tomorrow, after an historic drop of over 1000 Dow pts, but more likely it is a drama that unfolds over a week or so, touching the eventual bottom several times. Zoran Gayer used to say that in these circumstances expect a triple bottom. And that is what happened in 1987, with the first two happening quickly and the third over the next month or so. Also happened in 2002, with the bottom stretching over 9 months.

At the first bottom expect to see (a) huge volume, at least 3 Bn shares traded that day; (b) a churning just at the bottom, as shares rotate from bears to bulls with no apparent motion; and finally (c) a very sharp and fairly high rally. Much like 1987. And Oct02.

If we crush through Dow7200/SP777, no telling where this stops. On the way up, we had a number of pauses, most notably at Dow3600, where Prechter first thought we would peak (way back in the '80s); Dow4000, where the dot-com fever first broke out in 1995; Dow 5440; and Dow6000 / SP650, numbers bantied about due to Fibonacci relationships.

These are only some of Prechter's many way stations on the way up, but they end around Dow6k, as he stopped calling the top, after having lost credibility for too many Wolf! Wolf! calls. I dare say his credibility is back.