Sunday, 13 October 2013

3 charts to explain why I think US stocks may have begun a 50% decline from September's high

I think there is a chance that US stocks have begun a large decline from the September high, potentially 50% on the Dow, and likely similar for the S&P 500. This post uses charts of the Dow to illustrate, through to the close of futures trade last week.

First chart illustrates the big picture, with an arithmetic scale weekly chart showing the Dow for the past 30 years. The Dow is testing long term trend channel resistance. It is reasonable to look for a turn lower from such a resistance level. A decline toward the bottom trend line would be a fall of 50%. This is a potential, not a forecast. A move below last weeks low would breach the second trend line from the top, and if market action in the years 2000 and 2007 is anything to go by, such a move would open the way for a large decline. Last week's low is key. 

Interesting to note that the bottom left corner of the above chart contains the fabled crash of 1987, so small on an arithmetic scale chart, compared to the mania that has followed.

Next I've shown a daily chart. Three things of note. Firstly, this chart illustrates and echoes the point that last week's low is key, as it coincides with trend channel support. Secondly, I have marked point A to identify an exhaustion gap, just prior to the September peak. Thirdly I have marked point B to show a gap in the decline from the September peak. The market closed gap B on the close of trade last week.

Last chart is an hourly chart of trade since just before the September high. The market shows a clean 5 waves down, which under the Elliott Wave model indicates that the next larger degree trend is down. The market has swiftly rallied a Fibo 50% of the decline, just (just) enough to fill the gap from late September. These factors place the market at an ideal point to turn lower and begin a move to retest last week's low. Of course the market can ignore this setup if it chooses. The important point is that the wave pattern indicates the larger trend is down, a view that would only be negated by a move above the September high.

Repeating the main points, last week's low is key, and any move below last week's low opens the path for a large decline in coming months and years. Of course, there are two sides to every trend line or support/resistance level, and while the market remains above last week's low it may hold up for a further period, or even rally higher. Anything is possible. Many things are improbable.

Gold daily chart - holding above key support. What's next?

Gold held just above key support at the end of last week's trading. What's next? A move below Friday's low would make very likely a test of the June low. On the other hand, a rally through the nearby overhead down trend line would make possible a rally to test the August high, though before a rally could reach that level, 1350 is significant resistance.

EUR/USD channeling lower toward test of key trend line support

Hourly chart shows the EUR/USD moving lower in a trend channel.

Daily chart illustrates that a continued move lower would test key trend line support. A move below last week's low would breach that support.

Weekly chart shows that any turn lower from the current long term trend line test has potential to begin a large decline.