Jeff Greenblatt
As you know, for the most part I prefer to keep my nose out of news events. There are several reasons for this. First, I know you can get detailed analysis from multiple sources which do a far better job than I ever will. Second, I know you come here to get a brand of analysis not available in many places. But every so often, events come along that could have a profound ripple effect into our world of technical analysis. If they so happen to come along at a key point in our cycle windows, they will get the priority they deserve.
This is one of those times.
According to AP reports, Bear Stearns, American institution, lost nearly half its value or about $5.7 billion in a matter of minutes as investors, customers and lenders withdrew their business or rescinded credit lines. As we know, JP Morgan is going to provide secured lending to BS for 28 days. These loans are essentially insured by the Fed. In doing so, the Fed is tapping a mechanism which is part of their charter (Federal Reserve Act) and not used since the Great Depression.
If this weren't enough, other investment banks plan to report earnings early in the new week. All of this does seem reminiscent of the days leading up to Black Thursday. I've saved you the time and reproduced the Wikipedia version of the events leading up to that event:
"Three catchphrases, Black Thursday, Black Monday, and Black Tuesday, evoke this collapse of stock values. All three are authentic, for the crash was no one-day affair. The initial crash occurred on Black Thursday (October 24, 1929), but it was the catastrophic downturn of Black Monday and Tuesday (October 28 and October 29, 1929) that precipitated widespread panic and the onset of unprecedented and long-lasting consequences for the United States. The collapse continued for a month. Economists and historians disagree as to what role the crash played in subsequent economic, social, and political events. The crash in America came near the beginning of a period of economic decline in the industrialized nations, the Great Depression, and led to the institution of landmark financial reforms and new trading regulations.
After an amazing five-year run that saw the Dow Jones Industrial Average (DJIA) increase in value fivefold, prices peaked at 381.17 on September 3, 1929. The market then fell sharply for a month, losing 17% of its value on the initial leg down. Prices then recovered more than half of the losses over the next week, only to turn back down immediately afterwards. The decline then accelerated into the so-called "Black Thursday,” October 24, 1929. A record number of 12.9 million shares were traded on that day. At 1 p.m. on Friday, October 25, several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor. The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank. They chose Richard Whitney, vice president of the Exchange, to act on their behalf. With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As amazed traders watched, Whitney then placed similar bids on other "blue chip" stocks. This tactic was similar to a tactic that ended the Panic of 1907, and succeeded in halting the slide that day. In this case, however, the respite was only temporary.
Over the weekend, the events were covered by the newspapers across the United States. On Monday, October 28, more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 13%. The next day, "Black Tuesday,” October 29, 1929, 16.4 million shares were traded, a number that broke the record set five days earlier and that was not exceeded until 1969. Author Richard M. Salsman wrote that on October 29—amid rumors that U.S. President Herbert Hoover would not veto the pending Smoot-Hawley Tariff bill—stock prices crashed even further.” [5] William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks in order to demonstrate to the public their confidence in the market, but their efforts failed to stop the slide. The DJIA lost another 12% that day. The ticker did not stop running until about 7:45 that evening. The market lost $14 billion in value that day, bringing the loss for the week to $30 billion, ten times more than the annual budget of the federal government, far more than the U.S. had spent in all of World War I.[6]"
My whole concern with this derivative business has always been a rocket scientist couldn't figure out where the end of the trail is. I doubt Albert Einstein could figure it out. A look at a chart of Bear Stearns and it begins to resemble events of 1929. What I've attempted to do is keep my head in the charts and look for news events that confirm our cycle work. We've had two huge cycle events in the past four months. The first, which was the 262 week cycle to the October bear market bottom I covered for this magazine and the result was the Dow and SPX topped on the very last high probability date of that enormous window. I'm not one for bold predictions but I did tell my readership as early as April 2007 the cycles could be setting up for the most important pivot of the decade. In the fullness of time, that statement was not hot air. That pivot has led us to the current situation which is a crisis of confidence not seen since at least the 1970's and quite possibly since the events described above.
Now we are on the back end of these cycles as the full extent of the 262 week window with the all important secondary low of March 2003 concludes next week. As we come into the week, we are approximately 261.5 weeks into the cycle. Since some of these events do happen in the middle of the week and this is a holiday shortened candle, I'd give the cycle the leeway into next week for the plus one factor we always discuss.
In past updates, I've described a scenario where literally anything can happen. My research includes literally thousands of man hours studying cycles in all degrees of trend and have concluded these 262 week windows can be tops, bottoms or the point of recognition where we accelerate in the direction established. I've adopted an attitude where one has to be ready for anything. But it seems that events are taking shape that is setting a course in a specific direction.
In the near term, we had a couple of serious bounce attempts last week. The problem was all they could do was get us to near term or first resistance. On Friday, we started out with bullish potential, as the NDX tested Wednesday's high near 1764. Wednesday's high was a retest of March 5 at 1768. The March 5 high was a confirmation of the gap down on February 29 which is the important resistance level for this cycle. Technically, we had a shot but I told readers who were not super aggressive not to consider long positions until we could take out that resistance. The Bear Stearns news did interrupt the technical flow but since we are in this huge 261 week window with March 2003, it is timely. There is also a Fed meeting on Tuesday which could end up being a match to gasoline. My concern is we failed so close to important resistance.
Since we are coming to the close of this window which essentially began February 25, anything is possible. Technicians are aware the largest part of a move can come at the end of a cycle. That being said, we are now extremely susceptible to a sharp spike to the downside. It doesn't mean its going to happen but there is a reasonably good chance. As far as trading such an event, one must be extremely cautious because it is just as likely to make a quick rebound.
