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Can a Stock Market Meltdown Happen from Here?

We have finally reached the part of market confusion after 18 months of sell-off conviction.

Following the bounce off Oct 2008, very few analysts would consider that a bottom has already been set. Most, including myself, have concluded that the worse were yet to come. The sell-off into Oct 2008 has so much conviction in it that all momentum charts in weekly and monthly time-frames went into extreme ranges including the VIX. Extreme momentums don't dissipate suddenly, they have to be "worked out" first before a recovery can happen.

Time flies and many predictions following Oct 2008 bounce did happen. Dow Jones went down further to 6,500 and SnP to 666.

After the March 2009 bounce, we have a conundrum, if you will, we really don't know what is going to happen next.

One thing is of higher probability in technical analysis; the monthly charts for Dow Jones, SnP, and Compq are either at or entering the 4th-wave of the C wave that started Oct. 2007.

For those technically inclined, 4th wave is the most confusing part of a C wave. This usually results in a lower low for the final capitulation sell-off we call the 5th-wave. There are too many technical problems to be worked out (much like fundamental problems the American economy is facing). Nothing is for certain at this stage. 4th-wave cannot happen without any sign of hope. Now we do have signs of hope. Nor is it a stage where problems have already been solved. We still have tons of problems to work out. Whether nor not most of them are on the mend with the massive Fed and Treasury bail-outs is a major question that will be answered in time.

Seasoned traders and investors are not going wait until all of them got solved before buying stocks and funds. They call it either the glass is half-full or half-empty.

One thing is for sure despite being a neophyte investor as I am:

This current "crisis of the century" is another "opportunity of a lifetime" similar to the 1929 to 1932 market market meltdown. Investors who bought stocks in 1932 were never given any chance to buy stocks at such unprecedented discount after only 3 years of correction. Likewise, without government assistance, many companies went into wholesale bankcrupcy during and after 1929 to 1932 market meltdown - taking investors with them. Overall, it was a one-time "investment opportunity of the 20th century" for the lucky ones.

Stock markets and the American economy have considerably matured since then. Mistakes, big and small, had been made and more mistakes will be committed in the future. It is a never-ending learning process until mankind no longer exist.

Unlike the 1929 to 1932 stock market correction. We are now in the 9th-year of stock market correction that has started since year 2000. The Tech Meltdown of 2000 to 2002 was the initial correction to the sustained rally of 1980's to year 2000 where Dow Jones went parabolically up from 1,000 to 11,750. Such a bubble rally of 1980-2000 have proven throughout history to be unsustainable in the long run and will have to correct one way or another.

The rally from year 2002 to 2007 was not an impulsive rally or a bubble rally but rather a corrective rally. We call it a bear market rally and as such was not sustainable for a prolonged period of time. This market sell-off of 2007 to 2009 confirmed the rally from 2002 to 2007 was a bear market rally, it was a short-lived rally.

The sell-off from 2007 to 2009 was not confined to a single sector but rather involved the housing, banking and finance, retail, manufacturing, etc. But the experience of 2000 to 2007 is not lost; they provided a buffer in order to prevent a shock correction to the 1980 to 2000 rally. Many companies (outside of housing, banking and finance, and retail) were able to implement conservative corporate policies that should enable them to survive the current crisis. Banks and the housing sectors, who are at the most risk, likewise, got massive government assistance that should enable them to survive in an otherwise dire situtation. The lessons of the Great Depression is not lost to the Fed and the Treasuries. Unlike Bush who left everything to Paulson and Bernanke; Obama is doing a fine job of trying to change public perception of the current crisis in order to prevent the onset of a self-fulfilling prophecy of us digging ourselves further into this mess. What is still lacking is a credible sign of leadership needed in order for us to dig ourselves OUT of this mess.

If Obama gives us the much needed Credible Leadership at this dire hours of American history, it is going to change the stock markets overnight and specially the American psychology over time on global economics not seen since after WWII.

One big missing piece of the puzzle at the current stage of American economics history that was founded on consumerism but is now entering the tailspin of an aging baby boomer population.

Ronald Reagan's SDI was for defence psychology that propelled America into a global military dominance. We need something akin to SDI but on the economics side in order to usher a "new world" for the American economy.

A deeper look into China which is now undergoing a credible economic revival sans US and European consumers and that of the developing countries that are starting to follow China's lead might provide him enough insight into what lays ahead for the future of American capitalism.

This is "World War 2 or 3" as far as the US capitalism is concerned in this rapidly expanding global marketplace of the 21st century. The baby boomer consumerism of the Western World has come and gone. It is going to be replaced by more than 2.5 billions of young baby boomers in China and the developing countries for decades to come.

Either the US companies compete in this global marketplace or be left behind and the United States becoming the next England or Spain of the future.

So far, based on 2000 to 2007 Bush MBA performance; the US decided to look inward by proping up the housing sector rather than energizing the manufacturing and technology sectors that were and still are needed to compete against China, India, and the other developing countries.

Too many competitors for global economic dominance? It's not a simple Gulliver vs. Liliputans. It is a Giant Gulliver vs. Two Mid-sized Gullivers and the Liliputans.


The over-extended rallies of the early 1920's to 1929 suffered a punitive correction.

Comparing this current 2000 to 2009 market correction to that of 1929 to 1932 is not correct. Time correction usually prevents punitive sell-off such as the 91% meltdown of Dow Jones in 1929/32 that led to the Great Depression. Thus, the call for wholesale punitive bankcrupcy proceedings for troubled companies are unwarranted at this time.

Dow Jones has gone down 54.23% from Oct 2007 to March 2009. I don't expect it to go much more than 62.8%. Baseline - Dow Jones 5,293 bottom if and when it does happen.

Now that we have finally reached the potential end-game to this 9 years of corrective process. It is hightime to invest in the "investment opportunity of the 21st century".

The bigger problem at this stage is not whether the markets are still going to make the much anticipated capitulation sell-off or not.

It is whether we will be able to invest at the most opportune time and at the right price and which companies are going to go bankcrupt and which surviving companies will provide the most bang for the buck.

This massively confusing conumdrum makes such a task so daunting that many of us will not be able to accomplish our objectives. Many of us may even end up not being able to invest or only be able to invest at much higher prices than we wish to pay in case the expected capitulation sell-off never happens but in fact may already have happened as of Jan to March 2009 sell-off.

Dow Jones gave 40% discount during the 2000 to 2002 sell-off. 54.23% discount is not bad at all this time around just in case we don't get additional discounts.

I'd say BUY the DIPs if they happen.
Buy the breakouts if unable to buy the dips.

Whether we go down to SnP 450 or not, the upside risks of a rally to 1553 and beyond far outweights further sell-offs.

Daily momentum was already able to achieve extreme reading to the upside and is now being "worked off". While that of the weekly has just been able to achieve reasonable extreme momentum to the upside for both DJ, SnP, and Compq. They will have to be "worked out" as needed.

Problem is the monthly momentum which is still trying to work itself out of extreme level to the downside. A small double bottom for the momentum indicators using either a fast MACD or the normal RSI will become a major catalyst for a sustained rally on the monthly chart. It is the shortest path to ending this conundrum in no time. A huge divergence buy signal on the monthly chart will result in a capitulation sell-off called the 5th-wave. Huge divergence needs considerable time to work itself out. It remains to be seen which one is going to happen. A third scenario with much lesser probability is that price simply goes up un-abated thus momentum indicators not providing double bottom nor divergence buy signals to technical traders.

SnP is a double top on the monthly, quarterly, and yearly charts.

They say there is no such thing as a double top. True, since almost all of them end up going higher.

Dow Jones is an expanding flat on the monthly and quarterly charts. Expanding flats have one major characteristic - the ensuing rallies are usually fast and furious that tend to rival that of the last sell-off or the C-wave of an A-B-C consolidation as we call it. Trying to chase the rally with pullbacks will prove futile to many traders and investors who are used to significant pullbacks to the ensuing rallies after a massive sell-off has completed.