Tug of War Between Bulls & Bears Still Ongoing

August 17, 1998

The Dow Jones Industrials finished the session for Thursday, Aug. 13 at 8459, down almost 94 points from the previous day's session. This pushes the Dow below its 200-period moving average--a very bearish indicator. While the overall near-term trend remains down, the past week has been characterized by an all-out last, ditch effort among Wall Street's bulls at restoring the formerly upward trend in the stock market. But our technical readings continue to show that the market's new course is firmly in favor of the bears.

Our call for the past week in the Dow was mostly correct, though our downside targets were not reached (yet). However, we must clarify our downside predictions based on a new drawing of the Dow's Gann swing chart. The swing chart we used for last week's forecast has been slightly modified to allow for new support and resistance levels. For the past two forecasts we have used a swing chart based on closing prices, rather than using the extreme intra-day highs and lows for drawing support and resistance lines (the correct procedure). Thus, our new Gann support/resistance levels in the Dow Jones Industrials are as follows: 8750, 8700, 8685, 8600, 8560, 8350 and 8150. These levels, especially the last four levels, will be very important in the days ahead. Keep a close eye on them.

We noted in last week's forecast that the Dow closed the week by registering the Japanese candlestick equivalent of a "Rising Three Methods" pattern in its daily chart. Indeed, this appears to have been the case, and the market responded accordingly, falling nearly 250 points (intraday) on Tuesday, Aug. 11 and another 94 points today. This candlestick formation is generally regarded as a bearish continuation pattern in the Sakata Method of candlestick analysis and we should expect more bearishness in the days ahead based on it. Using another Japanese candlestick technique, we may also draw a resistance level at DJ 8650. This technique, discovered by candlestick expert Steve Nison, is performed by bisecting the mid-point of the nearest long candle (in this case, Aug. 4's 300-point drop spanning approx. DJ 8850 to DJ 8500—350 points intraday). This forms a mid-point at DJ 8650. Since last week, we have not had a close above 8650.

The market attempted a close above this level earlier in the week, but failed, as evidenced by the long upper "shadow" line registered last Friday, Aug. 7. The resistance level at DJ 8650 should also be strongly noted. Any retracement (i.e., "bear market correction") by the Dow will probably not exceed this limit.

Yet another level to watch in coming days is the newest resistance level at 8448. This line was formed during the Dow's 247-intraday point slide on August 11 from 8572 to 8325, thus forming a mid-point at 8448). This level should be watched carefully in the days ahead as it should provide both a short-term support and resistance (when the market falls beneath this level). Today's close is only points away from this level and if the Dow breaks this level in the next day or so, it should mean more major point declines ahead.

From an Elliott Wave perspective, the Dow has unfolded in four well-defined "waves" of minor degree. Assuming one more drop to complete wave five is ahead, this will complete intermediate wave one, with a wave two upward "correction" to follow. This in turn will lead to more falling into intermediate wave three. Again, our downside target for minor wave five is between DJ 8000 and DJ 8150. This is because, in the Elliott Wave Theory, two of the three impulsive waves usually tend toward equality. And since impulsive wave one was nearly 500 points down, and impulsive wave three was approximately 700 points down, we would expect impulsive wave five to be between 500 and 700 points down from the top of wave four (presumably where we are now). [Note: Waves two and four are "corrective" while waves one, three and five are "impulsive" in Elliott Wave.]

The Dow Jones Transportation index continues to provide Dow Theory confirmation for the DJI's decline and is close to penetrating levels not seen since the mini-crash of Oct. 27, 1997. The Transports are looking very weak, and fundamentally, this is not a good sign. A falling Transportation index generally means trouble in the transportation sector of our economy, and since everything depends on transportation, we can expect a weaker economy based on this assessment alone.

The Dow Jones Utilities index is also showing much weakness in its more than 25 point fall from its all-time high level of 295 in July. This rapid decline adds further to our bearish argument. It has given a sell signal and its MACD indicator did not confirm the new high it registered in July and was already well on its way downward. When even defensive sectors deteriorate, it's usually a strong sell signal.

We continue to be amazed at the tremendous amount of propaganda coming out of Wall Street after these most recent declines. Newspapers such as the Wall Street Journal and Investor's Business Daily run headlines exhorting investors to "stay put" during the corrections and urging them not to "fret" when the (blue) chips are down. Earlier this week, both the WSJ and IBD ran nearly identical stories on the results of a recent poll that showed that many mutual fund investors (gasp) actually time the market (heaven forbid!). The really pathetic thing about these stories is that both articles chastised investors for this defensive (and highly intelligent) tactic. These so-called journalists were clearly trying to propagandize the investment public into believing that "timing doesn't work" and that it is somehow dishonest and unfair to everyone else to even try. We can hardly wait to see the backlash from misled readers these papers will experience when the market finally does collapse.

In summary, we urge investors to hang tight for the rapidlly approaching collapse in U.S. equities. Keep your positions in bear market mutual funds such as Prudent Bear, Rydex Ursa, Potomac OTC/Short and others. Short sellers, keep a close eye on your positions and keep your protective stops tight. The moment we've all been waiting for is coming very soon.

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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