We continue to believe the stock market could tank this week, and into next. It may not, but this is one of those times when it can, and the period can be pinpointed. Along those lines, be aware the Plunge Protection Team, or Working Group as it is known in the legislation, is also aware of this risk, and will be on active duty, heightened alert, ready to support markets - and legally buy stocks.
The Dow Industrials completed a two week Head & Shoulders top pattern with Monday's price action, perfect actually, and all that is needed is a decisive break below 13,450 to confirm its minimum downside target of 12,950, which would get us awfully close to the August 16th closing low it needs to close below for a Dow Theory Primary degree "Sell" Bear Market signal (assuming Trannies follow). This pattern appears at the bottom of page 11 tonight in our report to subscribers.
Monday's price action carved out very close to the remainder of Micro degree wave 2 up, as shown at the top of page 11. Wave 2 up is correcting Thursday's dramatic decline. The third leg of wave 2 up, {c} up may need another 50 to 100 points to finish. Doesn't have to have it, but the pattern allows for another small rally leg. Monday started out pretty scary, down 148 points at one point, but it was met by a huge surge of demand (three guesses?) out of the blue, which turned what looked like the start of Micro wave 3 down into merely the finishing touches of wave {b} down of an {a} up, {b} down, {c} up for 2. The point is, wave 3 down of iii down remains in our immediate future, likely sometime this week.
NYSE New Highs fell to 65, with New Lows again rising, up to 289 Monday. As mentioned, we got a sixth Hindenburg Omen observation Friday, a potential stock market crash signal. The smaller of New Lows and New Highs on Monday was 1.92 percent Monday, slightly below the 2.20 percent threshold required for a seventh. New Highs were not more than twice New Lows, the McClellan Oscillator was negative, and the 10 week moving average was rising, so we got close Monday. We can feel comfortable we are approaching a multi-month bottom should New Lows rise to the 600 plus area. They hit over 1,000 at the end of August, 2007. As discussed over the weekend, 289 New Lows is a bad number, not high enough to signal a major bottom, and not low enough to suggest downside risk is small.
Monday's McClellan Oscillator reading fell to -158.46, after a very small change on Friday, which told us a large price move was imminent. Monday's morning decline may qualify as the big move, but we don't think that is the move the M.O was pointing toward, not with two wave threes about to kick in. The Summation Index fell to positive + 1,217.68
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