first majestic silver

Closer the Bear Doth Tread

July 27, 1998

The week of July 20 was unexpectedly volatile in the U.S. stock market, and with each passing day it appears the long-awaited equities bear market is closer than most expected.

Based on several technical factors, it is becoming strongly probable that the Dow Jones Industrial Average (DJI) has registered its final high and is now finally ready to fall. From a purely Elliott Wave Theory perspective, the Dow's rise from the February low of 7700 all the way to this month's intra-day high of approximately 9350 measures five distinct "waves," fulfilling the technical requirements of the final upward leg of this multi-year bull market. Near term, the Dow's June rise from that month's low of 8600 to this month's high of 9350 can also be interpreted as completing five minor waves of a completed Elliott Wave. The only still-bullish possibility for this market, from an Elliott Wave perspective, would be an immediate rebound from today's (July 23) print low of 8932. A fall below the next closest support level of 8850 would all but annul this possibility and would give us good reason to believe a bear market is in fact underway.

Using yet another helpful technical tool, we see that the DJI's Gann "swing chart" is on the verge of registering a bearish signal. In the case of the DJI, the Dow's price chart registered a new price peak last week at 9350 before falling into a down trend with four consecutive lower closes (as of this writing). Not only have these closes been strongly downward, they have fallen rapidly and with little or no counter pressure from the bulls. The bears seem to be firmly in control.

Further analyzing the Dow's Gann swing chart, we can be fairly certain of a bear market when the Dow's next closest peak at 8850 is broken. When its next closest valleys at 8700 and 8600 are violated, we can all be assured the bear market is indeed underway. From 8600, it is all open sky to the Dow's next closest support levels between 7700-7850. It is precisely at this 900 point gulf between 8600 and 7700 that tremendous profits will be made—and in a very short time—by short sellers. We advise all speculative traders to keep an extremely close eye on these levels and be prepared to act once the Dow firmly breaks below them. Investors interested in hedging against the bear market but not quite as risk averse as high-risk speculators should consider buying shares in a hedge fund, such as the Prudent Bear Fund (888/778-2327). Only $2,000 minimum initial investment.

Of interest to market technicians, one very interesting technical feature of the Dow's daily price chart is the apparent "inverted triangle" pattern with a downward sloping hypotenuse that formed between April and July. While this interpretation requires considerable leeway in the way of drawing a horizontal upper boundary at approximately DJ 9200, it can still be argued that this rare and extremely bearish phenomenon is exactly what appeared in the Dow's chart. Under this interpretation, the "rule of five" was fulfilled as the Dow's price chart touched each opposing end of the expanding "triangle" a total of five times before rising sharply above its upper boundary and then giving way to bearish pressure. If this interpretation is correct, the coming collapse of the DJ Industrials should be a particularly vicious one, especially in the early stages.

We commented last week that the Dow Jones Transportation Average (DJT) had completed the first upward "correction" of its bear market and was heading lower once again. This call appears to have been right on target as the Transportation index fell right along with the Industrials throughout the week of July 20 and now hovers at 3382. This all but annuls any interpretation for higher prices in the DJT as the closest price peak at 3500 has been firmly violated. Its next closest price valley is at 3350 and should be broken by the time you read this commentary. Again we point out that under the Dow Theory, a falling DJT index serves as "confirmation" for a falling DJI index. When both indices are falling significantly, it usually means a bear market is underway. Such has been the case so far.

We also note that market breadth, which has been exceedingly weak in recent weeks, has become even weaker during the last few days. Beginning this week (July 20), the advance/decline ratio has deteriorated considerably, and declining issues on both the NYSE and NASDAQ greatly outnumber advancing issues. This also is a bearish indicator.

From a broader economic perspective, we note with great interest that several major indications of an incipient economic recession have intensified in recent months. Falling prices in the agricultural, petroleum, precious and industrial metals markets inevitably portend a major bear market for the broader economy, and such trends have been underway for over a year now (and several years in the case of agriculture). The "long wave," or "Kondratieff Wave" theory of economics demonstrate that deflationary trends in major commodity markets invariably precede and eventually spill over into equities, consumer and retail markets to form recurring cycles of boom and bust. Under the K-Wave theory, it appears that the U.S. is quickly heading into a deflationary recession (which could escalate into depression), known as a "K-Wave winter."

In order to survive such a K-Wave winter, one must possess strength, acumen and inner fortitude—qualities embodied in the bear. Rest assured, fellow investors, the bear is slowly emerging from hibernation and will soon dominate the advancing K-Wave winter. Will you be able to survive? If not, make your preparations now while the "weather" still permits.

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

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