Trannies do not seem too worried about economic prospects, and may be sending a message that a bottom is in, that the worst will be over before long, and that over the horizon, perhaps the latter half of 2008, we will see a rebound in both markets and the economy. Dow Theory says that for this Bear Market to continue, both the Industrials and the Transportation average must close below their recent closing lows. A crash now would accomplish that. The two key numbers are January 22nd, 2008's 11,971.19 in the Industrials, and January 17th, 2008's 4,140.29 in the Trannies. As of Thursday's close, the Industrials sit 275.81 points above this Bear market re-confirmation level, pretty close, however, the Trannies sit 616.58 points, about 15 percent, above its threshold. In other words, it would take a stock market crash for Trannies to confirm. Put another way, unless we get a stock market crash that takes the Trannies down with it, this Bear Market is terminal. Amazing.
Here is the thing: Dow Theory says, if one of the averages hits a new low, but the other fails to confirm, then this primary trend decline can no longer be trusted. It also sets the stage for a potential new primary trend Bull Market signal, should both averages then rise above their previous highs. In other words, it is possible the blue chips will plunge another 10 percent within this Bear market, however if Trannies do not follow, do not close below 4,140.29, it gives reason for optimism. Over the past week, while the Industrials and techs sunk nearly 5 percent, the Trannies held relatively firm, down only 1.5 percent, and in fact rose the past two days.
The rally in the Industrials from January 22nd's intraday low to February 1st's intraday high was 1,113.92 points. The decline since February 1st through Thursday, February 7th's intraday low was 647.30 points, or 58 percent. This retrace decline is very close to traveling a Fibonacci 61.8 percent, which keep the alternate possibilities alive, that there is one more strong push higher coming, that could take the Industrials closer to conventional resistance levels, around 12,900 to 13,100, before the coming crash wave that we expect, where a series of wave threes down occur in concert.
Enough feel good stuff. Short-term, the picture is getting ugly. We added two more charts tonight showing potential Head & Shoulders tops in the Industrials. That gives us three, close to completion, of differing degrees. The first is Thursday's one-day chart at the bottom of page 15. If we see prices drop below 12,120 over the next few days, it means there is a high probability that prices are headed for 11,940ish. That creates another set of problems. It means in doing so, the Head & Shoulders Top pattern shown at the top of page 15 will be confirmed, that pattern having a downside target of 11,600. That creates more trouble, as the dominos fall. That would confirm the Head & Shoulders top shown at the top of page 12, with a crash downside target of 9,750. So the first domino is a drop below 12,120.
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