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................................................. As you know, on a day to day basis we focus on the trees rather than the whole forest as that is our nature as short term traders. However at this juncture in the market some may want to know our bigger picture outlook - in other words, we will step back and look at the forest. The market is the place where we as traders come to "agree to disagree", so your bigger picture viewpoint may be different and as valid as ours. However we see two distinct possibilities that lie ahead, and will put them out there for all to ponder over the next 6 to 12 months as we work and wind our way through the biggest poker game on the planet. As of Friday, August 6, all the major indices we follow have gone into a "correction" by Wall Street terms, with the exception of the DJIA. Wall Street defines a "correction" as a selloff of 7% -10% and the Nasdaq Composite, SP500, NYSE Composite now fit this category - showing losses of 11.05%, 8.35%, and 7.85% respectively from their record highs just three weeks ago. The DJIA has been spared this label so far, down only 4.42% from its high. ** Preferred Scenario ** As we have been mentioning for several weeks now, the weekly chart of the SP500 cash index looks very similar to that of this same time last year. And the similarities there alone continue to be astounding. Here's another perfect fit from last year to put in that bag, as the symmetry continues. From the record print high (at that time) on Monday, July 19, 1998, the SP500 cash fell 133.23 points to its intra-week low three weeks later, peaking at 1190.58 and bottoming at 1057.35. Now look back at the record print high made intraday on Monday, July 20, 1999 at 1420.14 and subtract an equal 133.23 points. That gives 1286.91 as a target for a three week low - and the low this week, the third week down was 1287.30, a difference of just.39 points! So if the weekly chart continues this symmetrical pattern, then the next two weeks will be choppy trading and lead to a high during the option expiration week ending Friday, August 20. This oversold bounce will be very ragged, but eventually could rally 40 - 50 SP500 points from our low. Then from that reaction high, likely coming mid-week this week, the market would see an even harder selloff than we have seen thus far. With the Fed meeting and likely raising rates on August 24, a mini-crash not unlike last year could unfold into that date. Now we are not going to hang our hat on the chart pattern alone. It can change form but still have the same eventual outcome. We have additional evidence that this may play itself out pretty much like last year however. We've also been mentioning just how grossly oversold this market have become. Again, the most recent time that our daily and weekly internal oscillators dipped near this oversold was this time last year. These exaggerated extremes on our indicators demonstrate a tremendous amount of downside momentum, and as we've stressed over and over in our publication over the years momentum almost always peaks or troughs before prices do. As of Friday's close we have only a few bullish divergences, as most of our indicators fully confirm this low. Under normal conditions we would expect to see lower price lows with nearly across the board bullish divergences on our daily and weekly momentum oscillators before a good, solid bottom is put in place. This setup is not in place at the current time, so we suspect lower lows ahead. So, this all has the earmarks of another August - October bottom. Should this come to pass, then what? Since we are looking way out here it is hard to pinpoint a timeframe, however what we see ahead by mid Y2K is a big boom-then-bust possibility. First, the boom will come off of this August -October low in grand fashion. The 'buy-the- dips' and 'buy-and-hold' crowds will again feel vindicated and invincible, and all of the Y2K problems will seemingly be a thing of the past. A last gasp bull run back to record ground will probably be a lay-up for the market, possibly gaining in the neighborhood of 25% - 35% off of our late summer / early fall lows. With the 'buy- the-dip' conditioning process firmly ingrained in folks mind, and the return of the momentum players to the market, we think that the market will finally be the downfall of many of the new investor/trader type and wipe out many over-leveraged Johnny-Come- Lately's. The presidential cycle will have run its course, and so may have the current economic expansion. When the bounces don't bounce, it will be much worse for the bulls than they have experienced thus far this summer (or last summer/fall). We envision a 1973-1974 type correction coming, something that really wrings out the excesses built up over the last few years, or a 'return to the mean' as it might be described. It has been nearly 17 years since the low of the previous year has been broken, e.g., 1999 low was higher than the 1998 low, the 1998 low was higher than the 1997 low, etc, and we think that this record run will finally end within the next year. This is our preferred scenario, much more likely than our alternate scenario. ** Alternate Scenario ** This outlook is much shorter and to the point, arguing that the market is making an intermediate term bottom right here in this timeframe. It's not out of the realm of possibility that the market has just about completely discounted the impending interest rate hike. If the market does put in a low here, coinciding with the grossly oversold internal indicators, and runs higher right through the October timeframe, we feel that it will be on a death march into late this year. The technical underpinnings will not support such a rally unless it is extremely thin and selective, a 'nifty-fifty' type rally where only the bluest of the blue chips rally higher. This type of thin market move would go completely unconfirmed by our internal gauges, and such an occurrence would be something that most always precedes gigantic declines, not unlike the 1987 last gasp run higher. It is important however that the SP500 cash index does not break below 1276.00 on a closing basis, else this outlook would be void and only our preferred scenario would be left. We are not trying to be apocalyptic here, we just see these as possibilities in accordance with our big picture market work. Also, we use the word 'preferred' as a substitute for 'most likely', not because we are fans of bear markets. As we said in the entry, the market is the place where we as traders come to "agree to disagree." We offer this only as food for thought. Good Trading. Authored by Mike Reed |