Corrective or Bear Market Rally:
Wave Signals Newsletter
By Mike Drakulich 8-13-99
THE "THEME" CONTINUES
The "theme" I have forecast of major sea changes in Stocks, the
Dollar, and commodities continues to be reinforced by the market action of
recent weeks. The large declines in both the U.S. dollar and Stock markets
are very likely only the first "leg" down of what are likely to be
significant corrections or full fledged BEAR Markets. Subscribers to my
Email newsletter took excellent profits from dollar and stock market short
positions in the past week, and with todays large rallies we are already
beginning to reposition ourselves back on the short side. Elliott wave
patterns are very negative here, and once this corrective rally completes,
I believe the next "wave" down will be much more vicious to the downside.
As always we only deal in risk/reward and probability, but in my opinion
shorting this dollar and stock market rally is about as good as risk/reward
gets.
The "commodity" theme of a major long term low having been made in the
CRB continues to be reinforced by a powerful move off the July lows in the
CRB index, already hitting 7 month highs. Subscribers are also well
positioned in quality gold stocks, accumulated on weakness throughout the
July decline. Gold looks to have made a major low as well, and the
prognosis for gold and the gold stocks looks very attractive here as well.
I expect the rest of 1999 to be the most volatile time frame since the Fall
of 1987. Volatility, of course increases risk, but also increases
opportunity as well. The next several months should be interesting indeed.
STOCK MARKET
Things change quickly when "numbers" come out. It's obvious now that
the corrective rally process was not completed at yesterdays highs, and
that we are likely to see the S&P 500 cash index rally back towards the 38%
retracement level at 1325.95, perhaps higher. The Dow remains much stronger
here as it has already easily exceeded the 38% retracement at 10,817, and
already this morning reached the 50% retracement which came is at the
10,900 level. We might watch the Dow .618 retracement level at 10,983 for a
possible corrective rally top, that might coincide with the S&P hitting the
.382 retracement at 1326 in the S&P 500 cash index. What I can't believe is
how fast the 10-day Trin(Trading Index) moving average is going to get
overbought, today we are dropping off a 1.81 reading, so a closing reading
of .60 would place the 10-day at a very overbought .85, and put the 5-day
at an even more overbought .71.
This rally of course is relieving a deeply oversold condition
developed on the recent decline. What did occur with the horrible
advance/decline statistics we saw was that the McClellan Oscillator did hit
negative "breadth" or "momentum" thrust benchmark levels. Historically when
these levels have been reached within 3 weeks of all time highs, it has,
percentage wise, forecast much lower prices in the following weeks and
months. Remember, no historical indicator can be used alone nor is always
right, it is just when combined with Ewave patterns and other technical
indicators I use, that it presents in my opinion a rather overwhelming case
for lower prices in the stock market, perhaps easily as much as a 20-30%
decline in the major averages.
That is my current view on things, and I always attempt to stay open
and flexible based upon new evidence from the markets. However, in my view
the odds are about as good as they get that a major top has been made, and
the decline has a lot lower to go. Good luck in the wild weeks ahead.
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