Imminent Stock Market Decline

The Long and Short of It

In his last article, Wall Street Greek Technical Analyst Steven Ferguson outlined several ominous technical indicators that point to a change in market direction. In this piece, he clarifies and further details how the turn might play out given various factors at play. Ferguson says a "rounded top" is more likely in the near-term, which supports the exit from long positions at this point, while not necessarily directing immediate aggressive shorting.

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Imminent Stock Market Decline: The Long and Short of It

At present, it would appear that the market turning point is indeed at hand. The Greek exposited the real unemployment situation in his recap of Friday's labor report, which as usual, was meant to obscure the truth. Here in the Midwest, most of those I know on unemployment rolls have given up looking for work and would prefer to continue receiving their perpetual entitlement. And those who could offer them employment are uncertain about capital expenditures in the future, so they continue to do more with less while they still have more to do.

Do these signs of an enervated economy mean a stock market crash (or worse, a bond market crash!) is imminent? Did any of the technical indicators reviewed in "Who You Callin Short?" suggest a 20% decline should occur over the next five trading sessions? Certainly not. And just in case there might be any confusion as to the nature of the prediction offered by the previous article, here are some key clarifications:

• None of the cited technical indicators suggested that there would be any dramatic sell-off occurring on or about January 6, 2011. Instead, the Phi Turn date predicts a turning point in market action, probably containing an intraday high that would last for many weeks if not months/years (depending on whether the Phi Turn event marks THE top). The Phi Turn date has a tolerance of a few days in either direction. The presence of two Phi Turns within the past 6 trading session suggests that the turn may have occurred on Thursday.


• However, given the strong uptrend that has led to this point, the actual reversal is more likely to form a "rounded top" than a sharp ski slope. There remains a possibility within the Elliot Wave count (five of five) that the DOW could reach back to the 11750-11775 range, corresponding to 1280-1291 on the S&P. This would allow for one more intraday high early this week without violating the rules of the wave pattern. After that, a return to higher volatility is to be expected as the VIX appears ready to break out.


• Still, we note that the S&P cash index dropped ten points intraday on Friday to a very important line of technical support, 1260. A break below this support early this week would solidify the case for the market reversal. A convincing break back above 1291 would signal several more weeks of uptrend, with the projected price 2.5% above the previous 52-week high.


• Last, the confirmed Hindenburg Omen does forebode a steep decline but not necessarily an imminent one. In the last 25 years, Dr. Robert McHugh of Main Line Investors, Inc. found that 28 "officially" confirmed Hindenburg Omen signals have occurred. In all but one of those cases, a decline of at least 5% followed. In almost a third of those cases, a crash of 15-20% or more occurred. The precipitous decline could start at any time and could last any number of trading sessions.

Based on the above, this author recommends that readers take profits from long positions. More aggressive traders may weigh short positions in index ETFs, sectors or individual stocks that are highly correlated with the market at large. That's the long and the short of it.

Disclosure: I am short S&P 500 Index Futures



Article may interest investors in NYSE: GS, NYSE: C, NYSE: BAC, NYSE: WFC, NYSE: MS, NYSE: JPM, NYSE: TD, NYSE: PNC, Nasdaq: TROW, NYSE: STT, NYSE: STD, NYSE: DB, NYSE: BCS, NYSE: NBG, NYSE: JNS, NYSE: BX, NYSE: BLK, Nasdaq: MEMKX, Nasdaq: GECMX, Nasdaq: JEVOX, Nasdaq: PEMAX, NYSE: EEM, NYSE: VWO, Nasdaq: VEIEX, Nasdaq: ADRE, Nasdaq: PEBIX, Nasdaq: GMCEX, NYSE: MSF, NYSE: EEV, Nasdaq: REMGX, NYSE: GMM, NYSE: EDZ, AMEX: ETF, NYSE: FEO, NYSE: ESD, NYSE: MSD, NYSE: EMF, NYSE: TEI, Nasdaq: EMIF, NYSE: EFN, NYSE: EMT, NYSE: PCY, NYSE: PXH, NYSE: GMF, NYSE: GUR, NYSE: GML, NYSE: GMM, NYSE: EWX, NYSE: GAF, NYSE: EUF, NYSE: EET, Nasdaq: ABEMX, Nasdaq: AEMGX, Nasdaq: APERX, Nasdaq: PMGAX, Nasdaq: PMCIX, Nasdaq: AOTAX, Nasdaq: AOTCX, Nasdaq: AOTDX, Nasdaq: AEMPX, Nasdaq: AOTIX, Nasdaq: AEMEX, Nasdaq: AAMRX, Nasdaq: AEMFX, Nasdaq: AAEPX, Nasdaq: AEMMX, Nasdaq: ACKBX, Nasdaq: ACECX, Nasdaq: AMKIX, Nasdaq: TWMIX, Nasdaq: NDAQ, NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX.

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