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weekend update 2.0
Oct 12, 2008

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Tony

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After posting the weekend update on saturday, we reviewed all the charts. Those posted on stockcharts, those not, and historical charts. Certainly it would be anyone's guess where this market bottoms, as it is not being driven by stocks but by bond insurance, the CDS market. The tail is wagging the dog like stock portfolio insurance did in the 1980's, which led to the 1987 crash.
We knew after the 2007 bull market top that it was the end of a cycle wave, and this would be a cycle wave bear market. What we didn't estimate correctly was the severity of the decline. Now that the market has effectively crashed 34% in three weeks it's more important to review the other cycle wave bear markets: 1929-1932, 1937-1942 and 1973-1974. One could argue that 2007 was a supercycle top, or 2000 with an irregular B into 2007, or whatever. What's important is that most EWers recognized that a cycle wave completed at the 2007 highs, and at least a cycle wave bear market has been underway. In reviewing the previous cycle bear bear markets we observed the following:
1929: started with a 50% crash drop, retraced 50%, and then eroded for months on end to much lower levels, took 34 months.
1937: started with a 50% drop over 12 months, with a 40% crash in the middle, retraced 62%, and then eroded for months on end to a double bottom, took 61 months.
1973: started quitely, had a 62% retracement after the first drop, then crashed 33% near the end, and the market lost a total of 47%, took 23 months.
2007: started quietly, is near a 50% drop, with a 34% crash near the end, and this has taken 12 months.
Notice the three previous cycle wave bear markets either dropped 50%, or dropped then rallied 50%-62%, and then bottomed months later. Near DOW 7100 this market would haver dropped 50% from the 2007 highs. There is technical support between DOW 7100 and DOW 7400, these levels equate to SPX 769 and 789. There is also great support for the DOW at the 1998 and 2002 lows, which is also around these levels. Should the market hold there, a 50% - 62% rally over the next 8 months is possible, then a retest of the lows in 2010 at the four year cycle low. We may still get our ABC flat, but from lower levels. Lots of technicals going back to 1932 support this POTENTIAL scenario. Please review the chart...
DOW 1996

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