The Big One is Here!

August 5, 1998

We wrote in our commentary last Thursday that the "bear market has arrived" and that the new trend in the U.S. stock market was now the "friend" of all bears. Today's market action (Aug. 4) only serves to further confirm the veracity of this statement and provides all the credible proof we need, from a technical standpoint, to begin entering bearish positions in the market. These include bear market mutual funds, such as the Prudent Bear Fund, and short positions of individual securities on the NYSE and NASDAQ.

The Dow Jones Industrial Average plummeting nearly 300 points -finishing the day at 8487, - breaking its critical near-term support level of 8600. Tomorrow's market action should see the Dow plunge to below 8000, possibly finding support at 7700-7800 - at least for a while. We definitely expect to see 8000 broken by week's end. Volume on the NYSE, meanwhile, was at an all-time high of over 814 million shares traded.

We wrote in our earlier commentary, "From a purely technical perspective, the Dow can be seen as having registered the first two of its five initial Elliott Waves downward. Given that the third wave of any Elliott Wave advance or decline tends to be the longest, it would not be surprising to see a steep sell-off within the next week or so (assuming that our wave count is correct)." Indeed, today's market action confirms this analysis and we are now in the midst of the first "wave three" downward, minor term. Investors should expect this wave to penetrate key near-term support -- and we should be at levels below 8000 by Friday (7700-7800 would be our best estimate).

We also wrote last week: "From a Gann perspective, several key support and resistance areas are within close proximity to where the Dow now finds itself…Support/resistance levels to watch include 8900, 8800, 8700 and 8600. Below 8600 it is all air until the next closest support level at approximately 7700." Again, this level was broken today and there is no reason to expect anything but a continuation of the recent falling trend until at least 7700 is reached.

After falling to the 7700-8000 area, we can expect the Dow to register its first serious "correction," or retracement, of this infant bear market. Since wave two—which completed late last week—was especially short, we can expect wave four to be more pronounced, possibly retracing 38%-40% or more of wave three's long decline (again, "wave three" is our projected fall from 8600 to below 8000 for those of you unfamiliar with Elliott Wave Theory). After wave four's culmination, wave five should carry to the next level of support below 7700 at approximately 7400. At the very least, 7000 should hold as the support level for this first major leg down of the bear market.

Though it may be too early to call the market's moves longer term, we will further venture to predict an "a-b-c" correction to levels close to the 8600 level. This should serve as the last chance for investors who got caught in the initial collapse to "clean up" some of the broken pieces in their shattered portfolio before yet another vicious downward cycle begins anew. This first major bounceback from 7000-7400 should also provide an excellent opportunity for conservative short sellers to "ride the bear" down again after the market retraces. Historically, retracements in the early stages of a bear market, when some of the vigor from the previous bull is still present, are around 40 percent.

Robert Prechter, editor of The Elliott Wave Theorist, points out that the cumulative advance/decline line for the Dow Jones Industrials has been falling since April and is now experiencing an outright crash, recently reaching all-time low levels. Expect this trend toward deteriorating market breadth to continue in the weeks ahead. We won't recommend specific short sales for traders in this commentary—this is not the appropriate forum for doing so. We will, however, offer suggestions for sectors that should be considered as prime short candidates. They include the casual dining industry (i.e., restaurants); golf and sporting goods; retail shopping; and the airline industry. These are just a few of the many industries that surely will suffer financially under the wrath of the bear.

In last week's commentary, we further predicted the demise of President Bill Clinton as the bear market continues to develop. Since Clinton is an "economy" president, winning the presidency based on his promises to create and sustain a strong economy, we can expect his approval ratings to fall right along with the economy. Already, his accusers are increasing in number and the game appears to be up for the president in light of the latest revelations surrounding his alleged affair with White House intern Monica Lewinsky. Within minutes of the Dow's collapse of 200+ points on Tuesday, news media wires were running stories announcing that Supreme Court Chief Justice William Rehnquist had rejected an emergency appeal by the White House seeking to prevent administration lawyers from being compelled to testify before the grand jury investigating the Clinton/Lewinsky affair. So we see already that the president's support is beginning to erode.

Though we are by no means political pundits, we will
venture yet another Prediction — "Slick Willie"
gone by first quarter 1999, either through
impeachment or through forced resignation.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

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