In ongoing Struggle, Bulls Losing Grip

The tug-of-war continues, and the bulls are beginning to lose their grip in their battle with the now-dominant bears, a group of investors who are slowly emerging in their newfound role as vanguards of the U.S. stock market.

After falling nearly 1,000 points from its all-time highs, the Dow Jones Industrial Average is slowly maturing in its incipient bear market. In doing so, it, along with the S&P 500, joins the slightly more mature—but more virulent—bear market being experienced by small-cap stocks as represented Russell 2000 and other indices. As measured by the barometer provided by the Elliott Wave Theory, the DJI has now completed five waves of minor degree down to register a completed intermediate "wave one." As this is being written, the Dow appears to have completed (or is in the midst of completing) the final leg of its "A-B-C" correction before resuming the established downward trend. And remember, under the Elliott Wave Theory, "wave threes" down tend to be the most momentous in terms of ponits covered. If we are indeed to experience a crash on Wall Street, intermediate wave three would be the most likely wave in which it would happen.

Our Gann swing chart support/resistance levels have held up admirably in the past few days. Although our prediction that any bear market correction "would probably not exceed DJ 8650" was wrong, our Gann resistance level at 8750 has thus far held as a strong, unbreakable level that investors seem unable to overcome psychologically. We named 8700 and 8750 as support/resistance levels last week, with 8750 being the highest. We do not expect 8750 to be broken at this point. Under Elliott Wave Theory, most "A-B-C" corrections do not exceed the bottom of wave four, which in this case, is at DJ 8700. The Dow now rests (as of Aug. 20) at DJ 8611 (close to another of our Gann support levels at 8600). Thus, the Dow has fulfilled the technical requirements of an "A-B-C" correction.

We offer no downside target for the upcoming intermediate wave three decline except to reiterate our Gann support levels at the following areas: 8600 (where we are presently), 8560, 8350, 8150, 7800, 7700. There are, of course, many more below these aforementioned levels but we will refrain from reciting them until circumstances dictate.

The Dow's candlestick chart has also provided us with reliable warnings over the past few weeks. However, we must emphasize that candlesticks are intended only for short-term (three to 10 days) forecasting and cannot be expected to provide accurate warnings of price movements beyond that. Having said that, we note that the Dow's candlestick chart shows a bearish two black candle formation which, when "blended" together form an even more bearish candle with a long "real body" and a long upper "shadow." Nevertheless, we do not guarantee bearishness in the days ahead in the Dow's chart; in fact, we see what we believe to be a potentially bullish (short term) descending wedge pattern in the Dow's Aug. 20 intraday stock chart. That could mean more price appreciation on Friday (Aug. 21) and possibly beyond. Still, we expect the Dow to resume its decline once this latest pocket of bullishness has been exhausted.

And speaking of bullishness that has been exhausted, we note with extreme interest a fascinating and portentous phenomenon in the NASDAQ index that occurred today (Aug. 20). The index opened at 1835, seven points below its previous close at 1842. This forms a very rare price "gap" which most likely is a manifestation of exhaustion in this index. From a candlestick perspective, we can now draw a "window" of seven points between NAS 1835 and 1842 which should provide very strong resistance in the weeks ahead. If the NASDAQ's trend line ever again enters this "window" and fails repeatedly to penetrate the upper resistance level at 1842, we know it has met ultimate resistance.

Based on today's (Aug. 20) intraday performance in the NASDAQ, our analysis finds a potentially bearish triangle formation which appears to be nearly completed. This was preceded by an inverted triangle which the NASDAQ broke out of to a lower level to form the aforementioned triangle. If the NASDAQ breaks this triangle to the downside, watch out below. It could be a precipitous fall. Based on today's bearish gap formation, we fully expect to see this interpretation fulfilled.

We don't normally discuss bonds here, but feel it is necessary to provide warning to investors. Although most investment advisors, even the more sensible ones that we admire, are heavily touting bonds as a safe, can't-miss investment vehicle, our technical analysis of the 30-year U.S. T-bond shows a bullish descending wedge pattern, which portends higher yields and therefore lower bond prices in the weeks/months ahead. And according to the Commodity Futures Trading Commission (CFTC), institutional "smart money" investors hold their second largest net short position ever, which says a lot about where they believe bonds are headed in the near future. And Elliott Wave analysis of the long bond also shows a bear market ahead. So our advice for investors is to play it safe and avoid this sector for now.

For safety and virtually assured financial gains, we advise investors to consider short-term U.S. Treasury Bills as a conservative investment vehicle for the turbulent times ahead.