The Unpunctured Stock Market Cycle Points to Big Declines Ahead

By: Submissions

Robert M. Williams writes: This report is a follow-up to my September 13th report entitled “Running Out Of Time” whereby I projected the demise of the Dow for a number of reasons. At that time I stated my reasons for believing the stock market was going to turn down. I still feel it is important to grasp the turn of events about to befall us, especially in light of the fact the media is busy trying to convince us to buy “cheap stocks”. The Fed of course came out with its “twist” and the market shrugged it off for what it was, a lot of nothing. You simply swap out today’s debt for long-term debt, but nothing is solved. Congress has decided to keep the government open a bit longer but offers no solutions, and Obama’s jobs bill is on a slab in the morgue. Finally problems in Europe once again surfaced and Treasury Secretary Geithner has been assigning blame in an effort to distract Americans from the real problems that face them at home.

With that in mind let’s see what if anything has changed. First I would like you to look at an updated version of the Dow’s sixteen-month daily chart contained in my last report:

Here we get a much closer look at the April 29th top, a significant lower high, and the subsequent decline. We can see that the top formed part of a head-and-shoulders formation and the right shoulder was a failed retest of the April 29th high. Then came the decline that broke well below the March low and tested strong Fibonacci support at 10,633. That’s old news. Now I want to focus on more recent developments as we take a closer look at what’s developed over the last month or so:

Here we see the formation of a second head-and-shoulders formation, well below the neckline from the first formation, and that looks like distribution to me, in preparation for a move to much lower lows. Also you can see that recently the Dow posted not one but two consecutive closes below the new neckline indication the willingness of the Dow to move down below the August closing low of 10,733.

Aside from the recent behavior of the Dow we also have new developments in the Transportation Index:

This chart appears to be almost identical to the previous chart of the Dow but there is one glaring difference. In the month of September the Transports made yet another new closing low for the year, and this closing low is unconfirmed by the Dow. The Transports are important because they lead the Dow and have been doing so for several years. So if the Transports are making new lows, it’s a safe bet that the Dow will be following in its footsteps sooner rather than later.

In conclusion there are other signals indicating that the Dow is headed lower if only one cares to pay attention. The number of new 52-week lows rises every week and volume on declines is always greater than on rallies. What’s more the two triple-digit declines this week were 96% and 93% down days while neither of the triple-digit gains on Monday and Tuesday registered a 90% up day. This tells me that the urge to sell is still considerably greater than the urge to buy and is a long way from being exhausted. Friday saw the Dow close down 240 points at 10,913, back below 11,000, and I believe it will test the August closing low of 10,733 some time this coming week. My advice is to be out of stocks altogether and for those of you who understand the market, you would be wise to sell short the Dow and/or S & P. There are big declines coming and you might as well get paid for the pleasure!  

Robert M. Williams
theunpuncturedcycle@gmail.com

Copyright © 2011 Robert M. Williams

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