Stock Market Update 18 February 2009

Welcome to the latest installment of ECAM.

Normally I save updates for the weekend but a significant event occurred on Tuesday, Feb 17 and it needs to be brought to everyone's attention.

In a previous blog, I alluded to a possible chart pattern that could potentially result in a catastrophic market crash. Several indexes over the past week have displayed such a pattern but Tuesday the S&P 500 also completed this pattern. This is an extremely bearish development.

The pattern is known as a symmetrical triangle. It can occur at any time during a trend and indicates a period of market indecision. As a consequence, following it's completion it can either continue in the direction of the trend (which is normally the case) or it can reverse into the opposite direction (thereby changing the trend). As of Tuesday, all the indexes have completed the pattern to the downside indicating we are going much lower from here.

The question is how low do we go? If this pattern is a "stand alone" symmetrical pattern, the price target is calculated by taking the number of points from the high of the pattern to the low of the pattern (the broadest point of the triangle) and subtract that number of points from the point of breakdown to give you a target.

The other alternative is this symmetrical triangle could be part of a more complex pattern known as a pennant pattern. In this type of pattern, target price is calculated by taking the height of the first part of the "staff" of the pattern and then take that amount from the breakout point to arrive at a target (the common quote is "flags and pennants always fly at half staff"). More on that below.

First chart is the Dow Jones World index charts (click on all charts to enlarge):

Dow Jones World 6 month daily chart:



It can be clearly seen that price action over the past 4 months has taken the shape of a symmetrical triangle. The key to note is as of yesterday price broke below the triangle and below the very important support line at 153.99. This is extremely bearish.

Should this be a symmetrical triangle breakdown, the price target would be as follows:

186.98 - 143.41 = 43.57
158 - 43.57 = 114.43

Note the price target is a further 24% below current closing levels.


Dow Jones World Point and Figure chart:



The point and figure chart reflects a clear breakdown below the 156 level. This is known as a Triple Bottom Breakdown and is extremely bearish.

Initial price projection based upon the structure of the chart is 134.


Dow Jones World 4 year weekly chart:



Just a reminder that the bear market call I made at the end of Dec, 2007 is still in play. This has the potential to be the worst bear market since the 1929-1932 depression.

Irrespective of any bounce we may have along the way, until the MACD crosses back above zero and the 13 week exponential moving average crosses above the 34 week exponential moving average, any rallies should be sold.


Even More Concerning:


I mentioned in a previous blog how I was watching the S&P 500 index closely. In my opinion it is the most important index to watch as this worldwide bear market will not be over until the U.S. leads the world out of it. As such, the SPX provides the best view on when the U.S. has truly turned.


S&P 500 index charts:

S&P 500 3 month daily chart:



This is the chart I have been watching like a hawk for signs of a breakdown. This happened on Tuesday as can be seen by the break below the bottom of the triangle and the previous levels of support around 800. Note this was done on increasing volume which confirms the breakdown as being "real".

It can be safely assumed that we are going to test the bottoms of late Nov, 2008. This will be a critical test but as there is very little chart support at that level, I expect that low to be exceeded to the downside.

Assuming this is a symmetrical triangle, the calculated price target is 560. Note this is a BEST CASE scenario; more on that below.


S&P 500 Point and Figure chart:



The point and figure chart shows a clear Double Bottom breakdown through 810 (and the previous low at 805). It is now clear sailing down to the 745 level clearly evident on this chart.

Price projection based upon the structure of the chart is 740.


S&P 500 1 year daily chart:



This is where it gets really interesting/scary. As I mentioned earlier, the pattern can be either a symmetrical triangle or a pennant formation. Price projection based upon the symmetrical triangle was covered previous.

If this in fact turns out to be part of a pennant formation, the price target (as shown on the chart) is 263. If achieved, this would be price decline of 83% from the 1576 top achieved in mid Oct 2007. Note this would be in line with the price drop experienced from 1929-1932 and there is no doubt in my mind that this level is possible.

The ramifications from such a decline are clear. If you have not done so, I once again urge you to read the blog entry I had on the Kondratieff Winter as I truly believe we are in the early stages of such a period.


S&P 500 30 year weekly chart:



This last chart puts things into perspective. It is a 30 year chart of the S&P 500 index.

The keys to note is:

-there is a well established trend line going back to 1982. This trend line was tested during the Nov, 2008 low @ 741.02. Any significant decline below this level and this trend line is broken.

-should the trend line be broken, there is some insignificant support around the 600 level. Should this not hold, the next level of solid support is around 490 (which is in line with my prediction in early Jan that we would see 500 on the SPX). Should this level be achieved, we would have to assume the pattern we just broke out of is indeed a pennant formation and not just a symmetrical triangle (as a break of the 560 symmetrical triangle price target would point to a pennant formation being the dominant pattern).

-should 490 not hold, the next support is in the 338-216 price range (pennant price projection of 263 is right in the middle of this range of support).


Bottom Line:

The markets are severely oversold at this time and I expect an upward price correction over the next few days. It is common on triangle breaks to go back to retest the broken trend line and I expect we will see the SPX test the 836 level. This is also options expire week (on Friday) so it can be expected there will be increased volatility both on the upside and the downside.

Irrespective of any short term advance, the triangle/pennant formation is now active and must be respected.

The only thing that would negate this formation is a price break of the top of the triangle (currently around 890). If this were to occur, it would set up a totally different pattern (an inverted head and shoulders pattern) which would be bullish. If this occurs, I will blog accordingly but as we stand now we must assume the trend is down and the price targets on the SPX are 560 followed by 263.

Should these targets be achieved, this will come with what will be looked upon in the future as the 3rd "Great Depression". There is no indication that this will not happen and we could be in for another 6 years of declining economic indicators worldwide (which would match the calculation of the Kondratieff Winter of 15 years having begun in 2000 and taking us to 2015).

As I mentioned previous, the key assets to hold during times of deflation are U.S. cash (or cash equivalents such as short term U.S. treasuries) and to a lesser degree gold and/or gold stocks (I plan on doing a blog on gold soon as bullion should be at least a small part of everyone's portfolio).

As of today, my "strategic" positioning in my provident fund account remain as follows:

-100% Black Rock/MLIM US Dollar Cash Fund (actual positions: USD cash 91%, equities 9%)*

*Strategic allocated percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).


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