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What's Next for the Dow Now that the Credit Bull Market Has Ended?

By Editorial Staff Fri, 25 Jul 2008 14:00:00 ET

All right. So that’s been the silent crash. And during that time, the nominal Dow was the thing that kept people’s eye off this ball. Figure 10 shows the Dow Industrial Average from the 1974 low, in dollar terms.... There was a decline into 2002—perhaps the orthodox low in early ’03—and it’s been crawling upwards until October of last year.

 
This is why people continue to say, “It’s a bull market.” But it was mostly due to a bull market in credit, which lowered the value of the dollar so dramatically that the Dow, in terms of dollars, could go to a new high.

All right, so what were we looking at? We did the usual Elliott wave exercise and connected the lows of waves 2 and 4 to indicate where the channel was. And if you draw a parallel line across the top of 3, you should see the top of 5, and that’s exactly what we had at the final peak in 1999 and 2000.

When we extended the lower line, we found that right off the 2003 low, in 2004, the market touched that line but could not get back up through it. It spent the next couple of years crawling higher but couldn’t even get back up to touch this line, which used to be support and has since been resistance.

So, of course, we wanted to decide, “When do we know that wave b is over and wave c is in force?” This dashed line beneath the channel is not an orthodox Elliott wave channel line, but interestingly it is exactly parallel to the channel lines. It is formed by connecting the outside low point back in 1982 to the two outside low points here in 2002 and 2003. The Dow sliced through that line in January. It rallied back up to it in March and again touched it twice in May. So clearly the market knows that this line exists.

And it knew that this one—the lower line of the channel—did, too. After 9/11, the market really collapsed, but the line held. Then it rallied up to here—that’s when Conquer the Crash came out—and finally had another collapse in ’02 to break the line, and it has never gone back above it.

Well, we saw a mini version of those events here in 2008. The Dow broke the secondary line in January; then came back up to it, and now it’s falling away. So I think the Dow is now in an area where there is no support from any trendline at this degree, which is Cycle degree. There’s a long way down to go.

Now, we didn’t wait for these lines to break to act. We rather aggressively shorted the market about six times throughout this period. We were usually right for a month or two at each of these short term peaks, but then the market would go on and make a new high, so we were wrong.

Then came a wonderful day for us. This was in July last year, just about a year ago. And here’s a quote to show you the kind of thing we are up against here at Elliott Wave International, how contrary we have to be sometimes in expressing our opinion, and how difficult it is, because the world usually disagrees with what we have to say. I must admit, sometimes the world is right and we are wrong. But here we were in July of 2007, when Fortune magazine came out quoting the U.S. Treasury Secretary saying, “This is far and away the strongest global economy I’ve seen in my business lifetime.”

Now that is an amazing statement. It is very much like the statements on record from the summer of 1929. Well, less than a week later, The Elliott Wave Theorist came out—it was an Interim Bulletin, a one-pager—and we said, “Aggressive speculators should return to a fully leveraged short position now.” A couple of issues later we made it clear that it was possible the Dow could edge to a slight new high before turning down hard again, which is exactly what happened in October.

Today we have 300 S&P points behind us on this. So even though we had a number of false entries on the way up, we’re feeling pretty good about this particular position. In the last couple of issues I said we could not count on keeping this money, because the March lows had to be broken across the board. Well, the Dow has done that decisively. A couple of the other indicators, such as the NASDAQ, have held back. We’re waiting for those to go ahead and confirm as well, but it looks as if we are getting pretty much into that freefall territory.

Learn more about the how the Silent Crash is getting noisier by getting a copy of Bob Prechter's most recent Elliott Wave Theorist, which includes both the full video and a transcript of his talk, called "The 'Silent Crash' is Starting To Make Noise." Please click here for the special video issue with transcript. 

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