Value of Perfect Information

You are not going to believe this, but on Friday, August 27th, we got both a fifth official Hindenburg Omen observation and a 90 percent up day. Completely bizarre combination, which is the point. It is this sort of confrontational confusion inside markets which is the basis and background for all of the stock market crashes over the past 25 years. This does not mean we are definitely going to get a stock market crash, but it does mean the odds of getting one are far greater than the normal less than one-tenth of one percent on any given day. Because this set-up is rare, only 27 such set-ups over the past 25 years, it throws the market into a unique and infrequent population of only 27 occurrences, and within that unique 27 occurrence set-ups, we have seen a market rattling stock market crash 8 times, or 30 percent of the time this unique set-up occurred. The time span for this set-up is 120 days, 120 days of high risk. The market lacks uniformity, lacks certainty, lacks its normal stability. There were no instances over the past 25 years when a stock market crash occurred without an official Hindenburg Omen being on the clock. We now have a five observation Hindenburg Omen cluster.

First, let’s give the details on the latest and fifth Hindenburg Omen, which ironically arrives on a day when the Industrials rose 165 points, not the sort of day one would expect to see a Hindenburg Omen observation. There were 141 New NYSE 52 Week Highs (and by the way, coming on a day when U.S. Bonds tanked), with 74 New NYSE lows. The lower of the two came in at 2.36 percent of total NYSE issues traded Friday, which was 3,140. New Highs were not more than twice New Lows, the McClellan Oscillator was negative (-48.34), and the 10 Week Moving Average was Rising.

As for the 90 percent panic buying up day Friday, there is an amazing phenomenon going on since the April 26th, 2010 top. We have now had twelve 90 percent panic buying up days and thirteen 90 percent panic selling down days since that top. That is, 25 out of the past 87 trading days have been panic trading days, with an approximate equal number of up versus down. This is astonishing.

What does this mean? Pretty much the same thing as the confirmed and official Hindenburg Omen observation means, that the market lacks uniformity, that the market is in an unstable condition, and it is at these times that markets are especially vulnerable to a stock market crash. Again, this does not guarantee a crash, as the odds are only about 30 percent, but compared to the normal less than one-tenth of one percent probability for a crash on any given day, that is an astronomical increase in the odds for a crash. A 90 percent up day occurs when both up points and up volume are above 90 percent of total volume, with the converse being true for 90 percent down days. These are usually rare, but the incidences since April 26th, 2010 have been anything but rare. We get one on average every fourth trading day.

That said, if you are a high stakes gambler, there is a 70 percent chance we will not see a full-blown crash over the next three and a half months (120 days from the first observation, August 12th, 2010). But there are higher odds that a large and significant decline could come over this period, even if it falls short of a crash. The odds of a decline of 10 percent or more are 40.8 percent; the odds of a decline 8 percent or greater are 55.6 percent; and the odds of a decline greater than 5 percent are 77.8 percent — pretty high. Since August 12th, 2010, the date of the first observation, the Industrials have fallen 3.7 percent, and since the second and cluster-confirming observation on August 20th, the Industrials have fallen 2.7 percent. But there is a long way to go before the threat period ends.

On page 16 and 17 in this Weekend’s Expanded Market Report we show that the large Head & Shoulders top patterns from November 2009 have now completed in the S&P 500 and NDX, prices having fallen to the necklines. This increases the odds that a stock market crash is slowly developing and will have an acceleration point over the next several months. Why? Because to reach the downside price targets would require a decline greater than 15 percent, actually greater than 20 percent from the top of the right shoulders.

Check out our AUGUST Specials, including an amazing 8 month offering for only $189, or 2 years for only $459 at www.technicalindicatorindex.com. We also offer a 3 months for $89 budget friendly deal this week.

We cover a host of indicators and patterns, and present charts for most major markets in our International and U.S. Market reports, available to subscribers at www.technicalindicatorindex.com

If you would like to follow us as we analyze precious metals, mining stocks, and major stock market indices around the globe, you can get a Free 30 day trial subscription by going to www.technicalindicatorindex.com and clicking on the Free Trial button at the upper right of the home page. We prepare daily and expanded weekend reports, and also offer mid-day market updates 3 to 4 times a week for our subscribers.

“Jesus said to them, “I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day.”

John 6: 35, 38, 40

Periodically, the question of manipulation comes up and I’ve recently been asked if the Dow theory or any other technical method is still of value because of all the efforts to manipulate the markets. The short answer is, yes. While manipulation can have a temporary effect on the market, it cannot fix the problem, it cannot stop the inevitable and in the end it will only serve to make matters much worse.

I think we can all agree that every known influence, be it positive or negative, false or real, fundamentally sound or not, big or small, founded or unfounded, manipulative or not, all impacts price. Well, the very basis of technical analysis is that everything is discounted into price. So, if every influence known to man and the market is reflected in price and technical analysis is a study of price, then absolutely the Dow theory and other technical methods are just as valid today as they have ever been and the manipulative efforts to “fix” things does not matter. The only variable that I see in technical analysis, like anything else, is that one person will see the data to mean one thing, while another person may see it to mean something different. Therefore, opinions may vary, but still everything is discounted into price and it all boils down to the technician and his methods.

I know that some believe that the March 2009 low marked the bear market low, that we are now in a recovery and that the worse thing they see is maybe a “double dip” recession. I have stated all along that my research suggests to me that the rally out of the March 2009 low has been a bear market rally and that it should ultimately prove to separate Phase I form Phase II of a much longer-term secular bear market. Point being, we are all looking at the same price data, but different conclusions are being drawn.

As price moved into the July low, it seems that most who were even remotely familiar with Dow theory were proclaiming a so-called Dow theory “sell signal.” As the July 2nd low was made, I told my subscribers that this was not a so-called Dow theory “sell signal.” Rather, I explained that it was an intermediate-term low and that higher prices were expected. Point being, this was again another example of everyone looking at the same price action, but with varying opinions.

So, what may be occurring is that some people will look at specific technical opinions and then when they don’t come to pass, they conclude that technical analysis no longer works and it’s always easy to blame it on manipulation and the PPT. Again, everything is discounted into price and if a given forecast, based on a particular technical discipline does not pan out, then its because the analyst that made the forecast was in error in that he did not read the meaning of the price action correctly. We have all certainly been there before. It’s not that price was wrong and it’s not because of the PPT or manipulation, because regardless of what is driving price, everything is still reflected into price and price is what it is. It’s only the interpretation of price action that varies. With that all being said, any technical picture can also evolve, morph, take more time, or even less time than originally anticipated. As a technical analyst, one must be able to recognize when this is occurring and adjust with the new data. If not, then he will likely find himself out of step with the market.

Personally, it is my belief that manipulation only makes matters worse. As an example of this, all throughout the period between 2003 and 2007 I explained that we were seeing a stretched 4-year cycle. I recognized this based on my statistics, cycles work, and “DNA Markers” and I was able to adjust as the technical picture morphed and stretched. But, I knew that the 4-year cycle had not bottomed and I explained that the efforts by the powers that be to hold things together would ultimately only serve to make matters worse. There is no doubt that the manipulative efforts seen during this period contributed in a very negative way to the credit and banking crisis. In my eyes, this was largely accomplished through the unscrupulous lending practices and the financially irresponsible, resulting in the housing bubble, which Greenspan tried to tell us did not exist. But, in the end, the manipulation did not prevent the inevitable decline into the 4-year cycle low. All the manipulation did was blow the balloon up tighter and tighter as the 4-year cycle stretched and then, when it popped it simply produced a bigger bang, in that the manipulation did in fact make matters worse.

There have been continued efforts to “manage” the market throughout the bear market rally that began at the March 2009 low. Once the bear has sucks enough of the misguided victims back into his grip, the bear market rally will conclude and the assent into the Phase II low will begin. When this occurs, we will again see more manipulative efforts to stop the inevitable. But, once the bear market resumes, and if the “DNA Markers,” that I have identified at all other tops since 1896, are confirmed, then it will not matter. Once the proper setup is in place, all the manipulation in the world will not stop the natural forces in regard to the Phase II decline. I hope people are listening. If not, you have been warned!

The following text on Manipulation was taken from Robert Rhea’s book, The Dow Theory.

“Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated.

Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.

The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:

‘A limited number of stocks may be manipulated at one time, and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.’ (Nov. 29, 1908)

‘Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.’ (Feb.26, 1909)

‘…the market itself is bigger than all the ‘pools’ and ‘insiders’ put together.’ (May 8, 1922)

‘One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, ‘Between the Chains,’ in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.’ (The Stock Market Barometer) ‘…no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.’ (April 27, 1923)

‘The average amateur trader believes the stock market is guided in its trends by a certain mysterious ‘power,’ this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted.’

‘It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or ‘manipulating’ the market for a short period. The professional speculator is always ready to help the movement along by ‘placing his line’ while the little fellow timidly ‘lays out’ a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time—the ‘technical situation’ so dear to the hearts of financial news reporters.’

‘Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!’

I have begun doing free market commentary that is available at www.cyclesman.info/Articles.htm The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

On June 30th both the Industrials and the Transports closed below their June 7th lows. In doing so, anyone who had not already proclaimed a Dow theory “sell signal” seems to have done so at that time. I stated here in my last post, as well as in recent audio interviews, that I disagreed with anyone who has made such statements in regard to Dow theory. I have since received a number of questions asking me how so many people could be wrong about Dow theory and if my position has changed.

My position has not at all changed. My read is that the Dow theory bullish primary trend change that occurred in conjunction with the advance out of the March 2009 low still remains intact in accordance to orthodox Dow theory. Reason being, once a trend change occurs, it must still be considered to be in force until it is authoritatively reversed. According to orthodox Dow theory, the decline into the July low was not an authoritative reversal because in reality price held above the previous secondary low points. I also continue to believe that the advance out of the March 2009 low is one large counter-trend move that will serve to separate Phase I from Phase II of the ongoing secular bear market. It is for this reason that I continue to refer to the advance out of the March 2009 low as a bear market rally. Once the proper DNA Markers are all in place and confirmed, the Phase II decline will assert its deflationary forces far and wide. The current Dow theory chart can be found below. For more details regarding my views that a Dow theory primary trend change, which is erroneously referred to as a Dow theory “sell signal”, has not occurred, please see the July 9th article that was last posted here.

Now, with this all being said, I want to explain another point in regard to erroneous Dow theory calls that so many made in regard to the June 30th violation of the June 7th closing low. Assuming for the moment that the violation of the June 7th low is correct in that it did trigger a bearish primary trend change, which I do not agree is the case, then by default this would in turn mean that these same people are saying that the June highs marked secondary highs points. More details on the reasoning for this is available at Cycles News & Views. Anyway, the June closing highs occurred on June 15th at 4,467.25 on the Transports and on June 18th at 10,450.64 on the Industrials. Therefore, if price were to move back above these levels on a closing basis, then the same people who called the erroneous Dow theory “sell signal” on June 30th would then have to call a Dow theory “buy signal.” By not fully understanding the Dow theory, which is likely a function of having not read and studied Dow theory, one can easily find themselves on the wrong side of the market. Right as everyone was proclaiming the Dow theory “sell signal” in late June, the market bottomed and at Cycles News & Views, I was calling for a low and a rally on July 2nd as the market was bottoming. This was based on both my Dow theory work as well as my cyclical and statistical analysis. The Phase II decline is ahead of us. We are monitoring the averages as we watch for the DNA Markers and confirmation that has been seen at every major top since 1896. Please, do not misunderstand the message here. Longer-term, the entire advance out of the March 2009 low is a bear market rally that should be followed by the Phase II deflationary decline. All I’m saying here is that we have not yet seen a bona fide Dow theory primary trend change at this time. What may or may not be occurring from other technical disciplines, be it cycles, statistics, my DNA Markers, Elliott wave, fundamentally or whatever are separate issues, which are outside of the scope of Dow theory.

I have begun doing free market commentary that is available at www.cyclesman.info/Articles.htm. The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

Since April 26^th, the S&P 500 has plunged 16.2 percent, the NDX has dropped 16.1 percent, the Industrials have lost 14.0 percent, and the Wilshire 5000, which is essentially the entire U.S. stock market, has crashed 16.5 percent. $2.0 trillion has been lost from the U.S. stock market over the past two months. More downside is expected before this crash pauses, and we give downside targets in this Weekend’s Expanded Weekend Newsletter at www.technicalindicatorindex.com

In last weekend’s article we warned that London’s FTSE was in serious trouble. Since we wrote that article, the FTSE fell 4 percent. More downside is expected.

Major markets worldwide are plunging, with downside targets suggesting many indices could eventually approach zero, believe it or not. We are starting the second leg of one of the worst Bear Markets ever. The second leg of Bear markets sees the worst. This is a Grand Supercycle degree Bear Market, correcting a wave {III} rally from the 1,700’s. It will be one for the ages, and will likely usher in major political changes. What those political changes are is anyone’s guess, however we would not be surprised if one change involves a powerful attempt, which could be successful, in uniting western nations into a new super-sovereign nation-state. America’s founding fathers must be turning in their graves. This economy is in deep trouble. Why? Because the Central Planners forgot about the American Household, forgot about their need for cash, failed to pass a massive income tax rebate, failed to repeal property taxes, failed to grease the primary spending pump, the American Consumer. Now we are getting the second and most dangerous phase of the Bear Market, catastrophic wave (C ) down. It is just starting.

Short-term, there are several Bearish developments which took place this past week, including the crossing of the 50 Day Moving Average below the declining 200 Day Moving Average in the S&P 500 and NYSE. This “Death Cross” has also occurred in several international markets. We show this Death Cross in this weekend’s expanded newsletter for subscribers at www.technicalindicatorindex.com , including coverage of historical market performance after such a crossing. We can tell you the picture is not pretty.

A second Bearish Development was the breakdown of prices in several U.S. market indices below the neckline of large Head & Shoulders top patterns from November 2009. This development is a confirmation of these patterns, meaning the probability of stock prices falling to downside targets is now high. We show those charts in this weekend’s report.

Markets are oversold, however some of the greatest declines in market history occurred at oversold levels. For example, our Percent Above 30 Day indicator is at zero. However, in 2008, on October 7th, 2008, this indicator hit zero, and then was followed by a two week crash. That does not mean a crash has to occur now, but it can.

Conditions are conducive to a stock market waterfall decline at this time. We have a very unhealthy market, reminiscent of the condition normally identified by the Hindenburg Omen. While we do not have an H.O. at this time, we have had ten 90 percent panic selling down days, interspersed with six 90 percent up days over the past two months. This suggests a very unhealthy market. Normal healthy markets have consistent Bullish action or consistent Bearish action (which leads to important bottoms), but not both at the same time. This is a dangerous situation.

The chart below shows a massive Head & Shoulders top in the Wilshire 5000, with a downside target of zero, possibly being reached in 3 to 5 years. Between now and then we expect a stairstep plunge, a series of crashes and countertrend bounces.

Check out our Independence Day Specials, good through Monday, July 5th, 2010, including a fabulous 9 month offering, only $199, or 2 years for only $459 at www.technicalindicatorindex.com . We also offer a 3 months for $89 budget friendly deal this week.

If you would like to follow us as we analyze precious metals, mining stocks, and major stock market indices around the globe, you can get a Free 30 day trial subscription by going to www.technicalindicatorindex.com and clicking on the Free Trial button at the upper right of the home page. We prepare daily and expanded weekend reports, and also offer mid-day market updates 3 to 4 times a week for our subscribers.

“Jesus said to them, “I am the bread of life; he who comes to Me shall not hunger, and he who believes in Me shall never thirst. For I have come down from heaven,  For this is the will of My Father, that everyone who beholds the Son and believes in Him, may have eternal life; and I Myself will raise him up on the last day.”

John 6: 35, 38, 40

I’m going to go through some signs that rabid bears might do well to pay attention to because I think the market is very close to a major bottom. (That doesn’t mean we are guaranteed to make new highs, although we might. Just that we can probably expect an explosive rally soon, even if it ultimately turns out to be a counter trend rally in an ongoing bear market).

First off, way too many people are counting on the head and shoulders pattern taking the market directly down to 850. Folks, historically these head and shoulder patterns have a success rate of about 50%. A coin toss, in other words. Didn’t we learn that lesson last July?

Let’s go now to the charts. We have a large momentum divergence that has developed on the daily charts.

Also, notice that the market dropped down to the 75 week moving average yesterday and bounced strongly. You can see this same support during the prior bull. The 75 week moving average acted as final support during the entire bull market. That level also happens to be the 38.2% Fibonacci retracement of the entire cyclical bull move. Not an unusual correction in an ongoing bull, on both counts.

Next, we are now right in the timing band for a major intermediate cycle low.

At 21 weeks it’s just way too late to press the short side. You risk getting caught as the intermediate cycle bottoms initiating a violent short covering rally.

And finally, breadth is diverging massively during this final move down. As you can see the NYMO often diverges at these intermediate cycle bottoms. The divergence at this point is the largest in years.

Finally, I’ll point out that the February cycle bottomed on a reversal off the jobs report. I think it’s safe to say the market has already discounted a bad number so we could see shorts begin covering in a buy the news type trade, even if the number is bad. And if the number is good, we will see the market gap higher huge, trapping shorts and throwing gasoline on the fire of a short covering rally.

It’s just too dangerous to continue pressing the short side at this point. Better to just step aside and not risk getting caught in the intermediate bottom that WILL happen sometime soon, maybe even on today’s employment report.

London’s FTSE is in deep trouble. New Developments in the Bearish case this week are that the FTSE is forming a Bearish Flag pattern, and has nearly completed the Flag portion of this pattern. Flags fly at half mast in this pattern, meaning the depth of the decline that led into the flag will be the same as the depth of the decline from the flag. This gives a downside target of 4,300ish.

Also new and dangerous is the development where the 50 day moving average has now crossed under the 200 day moving average. This is very bad and means there is a high probability that the FTSE is headed much lower for an extended period of time.

The Daily MACD is curling over and very close to generating a new sell signal. Its histograms are shrinking and close to going negative which would trigger a new sell signal. The Daily Full Stochastics are on a sell signal.

The FTSE is about to sell off sharply.

In our Expanded Weekend Market Newsletters to subscribers at www.technicalindicatorindex.com, both the International and U.S. reports, we discuss if the coming decline in the FTSE will spread to other major stock indices globally.

Check out our June Specials, good through Sunday, June 6th, 2010, including a fabulous 13 month offering, only $259, a little under $20 a month, or 2 years for only $459 at www.technicalindicatorindex.com. We added a 3 months for $89 budget friendly deal this week.

If you would like to follow us as we analyze precious metals, mining stocks, and major stock market indices around the globe, you can get a Free 30 day trial subscription by going to www.technicalindicatorindex.com and clicking on the Free Trial button at the upper right of the home page. We prepare daily and expanded weekend reports, and also offer mid-day market updates 3 to 4 times a week for our subscribers.

“Jesus said to them, “I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day.”

John 6: 35, 38, 40

Over the years we have seen the stock market make some pretty exciting moves for share holders. This year alone there have been some interesting events unfold causing wild market swings which most of us did not think could happen. Things like countries going bankrupt and the May flash crash. Also the BP Oil well leak which looks as though its about to kill not only businesses around the world but a large population of animals and fish which our planet will never be able to get back… It’s been a crazy year!

It sure would be nice if the financial situations between all he countries could be resolved, and if we could have some proper regulations on banks and the financial system to minimize fraud and manipulation. From the looks of everything we have a few years still before things get sorted out, fixed and some what stabilized.

Below are some charts showing where the Dow, Gold and Oil are currently trading and my thoughts on them.

DIA – Dow Jones Industrial Average ETF – Daily Chart

The past 12 years we have seen the DJIA go through some large bull and bear markets providing those with trading experience to generate large profits in both the bull and bear markets.

Recently we have seen the DJIA pullback and test the key pivot point and has started to bounce. Although this price action is positive I have my doubts about another bull market rally because of how the chart looks. I focus most of my analysis on chart patterns, volume and market internals. These allow me to monitor the overall heath of the market on a daily, week and monthly basis. Using these techniques I am able to pull money from the market consistently.

This year we saw some extremely heavy selling in May which could have been strong enough to shift the trend from an up trend to a down trend. I call these large volume candles Get Ready Spikes. If they are green then we are looking for higher prices but when they are red it means distribution is starting and lower prices could start to form in the coming months.

The DIA chart below looks to be forming a very large head and shoulders pattern which is currently trading near the top of the right shoulder. This pattern is very bearish and points to much lower prices in the next couple years if the major support level (neckline) is broken.

GLD – Gold Exchange Traded Fund – Daily Chart

The chart of gold shows the same cup and handle pattern which I have been talking about for a while now. Last week the price of gold made a new high breaking out of this pattern. We could see the price of gold start to work its way up to the $1400-1500 level over the next 3-6 months which calculates to $140-150 on the GLD etf.

USO – Crude Oil Fund – Daily Chart

USO oil fund has been trend down for a couple months and recently put in a nice bounce from the May low. I feel as though oil is forming a bear flag and could head lower in the coming weeks. Until it breaks the key resistance level traders must be cautious if they have any long trades right now.

Weekend Dow, Gold and Oil Trading Conclusion:

In short, I’m bullish on stocks for the short term and think we could retest the April high in the next month or two. But after that the market could roll over and from there we could see much lower prices. Or we could see the indexes breakout and start another leg higher… During volatile times like we are in now… we must trade with caution until the overall health of the market clearly indicates the direction of stocks. Until then focusing on low risk setups and taking profits quickly is the safest trading strategy.

Gold looks to be setup for a strong move higher. I am hoping for another dip to shake out some investors before it continues its march upwards. Oil on the other hand is trading near a key resistance level. Only time will tell if it can break through and start a rally. If not then we will see the market struggle.

If you would like to receive my ETF Trading Signals take a look at my website: www.TheGoldAndOilGuy.com

Stocks sit this weekend at the precipice. Conditions are ripe for a waterfall decline. This does not mean there will be a crash starting over the next few weeks, so please do not go out and short the farm. What we can tell you is the risk of one occurring is higher than normal, that conditions that preceded prior stock market crashes exist right here and now.

I believe that short-term we are now in a high probability zone for a stock market crash. Further, I believe this catastrophic Supercycle wave (C) down leg of the Grand Supercycle Degree Bear Market that started in 2007 will see a series of stock market crashes over the next 3 to 5 years. Further, I believe that when all is said and done, the Industrials, the S&P 500, and most major domestic and international stock indices will be near the value zero. This belief is based upon the technical analysis patterns and indicators that we follow, and is not some wild speculative opinion. This is dangerous ground we stand on this weekend.

We have been waiting and watching for a Hindenburg Omen to surface, that would warn of a possible stock market crash. We have not had a stock market crash over the past 25 years without an H.O. However, we noted several months back in these pages that it is going to be very hard to get a Hindenburg Omen until deep into 2010 because prices had risen so far, so fast above a year earlier’s lows that it would be nearly impossible to see the requisite number of New 52 Week Lows on the NYSE to appear at the same time we get the requisite number of New Highs. We posited that did not mean a stock market collapse could not occur without an H.O. this time, that this time could be the exception to what we have seen over the past 25 years.

But a fascinating development has arisen that identifies a similar condition in the market that the Hindenburg Omen does, which increases our belief that in fact we could see a stock market crash start and continue over the next several months. The whole point of the Hindenburg Omen, the essence of what it is about, is to identify an unhealthy market, on the brink. I will quote Peter Eliades of stockcylces.com in his assessment of why a Hindenburg Omen identifies dangerous stock market conditions: “The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows — but not both.” When both new highs and new lows are large, “it indicates the market is undergoing a period of extreme divergence — many stocks establishing new highs and many setting new lows as well. Such divergence is not usually conducive to future rising prices. A healthy market requires some semblance of internal uniformity, and it doesn’t matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs. This is the condition that leads to important market bottoms.”

Now pay careful attention to Peter’s thinking. He is absolutely right. An H.O. is not magic. It is a reasoned indicator that identifies a deeply unhealthy market that is not conducive to future rising prices.

Well, get this: There is another indicator we follow every day which has spelled out the precise market condition as a Hindenburg Omen identifies. That is the number of 90 percent up days and 90 percent down days we have seen over the past seven weeks. Are ready for these stats? Amazing. Since April 16th, 2010, there have been eight 90 percent down days and five 90 percent up days. 90 percent days are panic buying or panic selling days. This is highly unusual market action. And it indicates as Peter says about the H.O., “the market is undergoing a period of extreme divergence . . . And such divergence is not usually conducive to future rising prices. A healthy market requires some semblance of internal uniformity, and it doesn’t matter what direction that uniformity takes.”

Do you see? The high number of 90 percent up days interspersed over the past seven weeks is botching up the uniformity we would see in a normal corrective downtrend — which would be a good thing for the market because it means a base building bottom is approaching. But there is not any uniformity to the decline from April 16th. Panic selling followed by panic buying followed by panic selling, etc… In other words, we now have the precise condition necessary for a stock market crash to occur over the next few months. This market has flies on it.

The most the Central Planners can hope for is an orderly decline over a period of weeks or months instead of a couple days of flash crashing. But a couple days of flash crashing where prices drop 2000 points over a few days cannot be ruled out. We believe that by the end of 2010, we would have seen stock prices fall at least 20 percent below where they are this weekend. There will be bounces along the way, but we have entered a period of time where lower lows and lower highs will occur, and that period of time could last several more years, into the 2012 to 2014 time period.

You can read an article on the theory and history of the Hindenburg Omen in our Guest Article section at www.technicalindicatorindex.com

There are several other troubling developments at this time: Head & Shoulders tops that started back in November 2009 in the major U.S. market averages are nearing completion with downside targets that require a crash to get there. This weekend, we show in our newsletter to subscribers at www.technicalindicatorindex.com something else that is interesting, a possible fractal pattern of the decline from October 2007 through 2009 may be occurring from mid-April, that is a declining wedge with a waterfall conclusion.

Check out our June Specials, good through Sunday, June 6th, 2010, including a fabulous 13 month offering, only $259, a little under $20 a month, or 2 years for only $459 at www.technicalindicatorindex.com. We added a 3 months for $89 budget friendly deal this week.

If you would like to follow us as we analyze precious metals, mining stocks, and major stock market indices around the globe, you can get a Free 30 day trial subscription by going to www.technicalindicatorindex.com and clicking on the Free Trial button at the upper right of the home page. We prepare daily and expanded weekend reports, and also offer mid-day market updates 3 to 4 times a week for our subscribers.

“Jesus said to them, “I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day.”

John 6: 35, 38, 40