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The stock market is very likely forming the mother of all tops, potentially one destined for the history books. As the first chart below shows, the long term view is grim, as the Dow Jones Industrial Average remains within shooting range of a major trend-line of an expanding triangle drawn across the 2000 and 2007 peaks. While that move to the trend-line may be deemed complete - and thus all the rally we are destined to get - the potential remains for one last gasp push to new highs to complete the move in the next week or so. If so, watch out below! If not, watch out below! Update continues below chart…
The next chart shows we are overdue entering the corrective churn period marked by the numbers 2 through 5, as the black line of 2013 diverts a little above the orange line of expectations when in high risk blow off phases like we are in.
Note the extreme risk red line is likely to start on one of those corrective pushes in either the number 3 or 5 position, with the larger view of the orange high risk line showing how things would look if the stock market is able to avoid the big win for the bears this year that confirms the red line of the next bear market has started.
If the bulls are able to survive and push to new highs going into year-end - not my expectation - then we would repeat the exact same process next year.
Since we already have two such years of the bulls winning this game of chicken, it is very unlikely the bulls are able to pull off a third such Houdini act. More the like, the end is nigh! Update continues below chart…
While it is very early in the selling process, the black line of the NASDAQ is perfectly lined up with the red line of the next bear phase.
The first green arrow is where the next bull market would start if the next bear phase started here and contained only one sell phase, like the 2008 bear.
The second green arrow is where the next bull would start if the bear started here and contained two bear phases, like the 2000-2002 bear.
The next chart shows the updated AK short term trading indicators delivering new short term buy signals from three of the four short term indicators we track.
This keeps the door open to one last gasp push toward Dow 16,000 to complete the bull, though we may simply forming a double top, depending on how much buy energy the bulls can find next week.
Either way, I want to be out of stocks later next week at the latest, and the current rally should be viewed as a seller's gift. Update continues below chart…
The chart below compares the current NASDAQ (white line) with other high risk blow off phases 2007 (blue line) and 1987 (purple line,) with the point of tracking progress of the indicators at the top and bottom of the chart against what usually happens in such high risk blow off phases. Note the overall AK strategy and trading rules was designed on comparison of all high risk blow off phases, and not just the two shown, as well as the other three phases of the bull/bear cycle.
Right now, the white line of the current NASDAQ continues to closely follow the purple line of 1987 in the middle rally position. The white line of the current contrarian indicator at the top of the chart has left the red circle, just as the 2007 and 1987 contrarian lines did to confirm the middle rally was over back then and the correction run to the green circle commenced. The dotted white line of the all-important ADX is weakening, while still trending north for now.
In general, one should follow the upper contrarian indicator when the ADX line is trending down, and the bottom trend trading indicator when the ADX is trending up. The latter remains south of a cross above the high risk - exit - line where the yellow circle resides, which suggests the new buy from the short term indicators may very well lead to new highs, to push the trend trading line into the yellow circle at the same time the Dow Industrials closes in on 16,000. Update continues below chart…
The current short term bounce will eventually reverse to deliver a significant plunge once the rally runs out of steam - probably starting the next Great Bear in the swooning process - with the prime question whether the current rally stalls near the May highs to form a double top, versus the rally having the legs to deliver one more push to new highs before the final top is in?
Either way, we remain in one of the most dangerous and potentially volatile markets ever, similar to 1929, 1973, 1987, 2000, 2008, so it is not a question of "if" the bears will win, but one of "when," with trading action the past week or so suggesting the "when" is getting mightily close.
As I said last week and the week before: get ready to sell…
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Have a Great Weekend!
Disclosure: I am long QQQ.