FAVORS for tonight.
Jerry Favors Analysis - Wednesday, September 30, 1998 8 p.m.
The Dow was down from the opening bell this morning and
at the lows the Dow was down as much as 255 points. We
closed down 237.90 points. Today was a somewhat difficult day
for us. We have told you that we expect a major breakdown in
stock prices during the month of October. We in fact still
have downside projections calling for 6703 plus or minus
270 points intraday in the Dow. That projection is due during
the month of October.The Bradley called for a low near
September 21 and a rally into September 28 plus or minus 2
days in each case. The Dow in fact reached an intraday low of
7653 on September 21 exactly and rallied 600 points to an
intraday high of 8253 on September 29,within 1 day of the
Bradley target. The Bradley now turns straight down until
late October,in a crashing type pattern. This does not mean
there will be no strong rally attempts during this time
frame. There could well be a strong rally attempt in the next
few days. As bearish as we are for the month of October we
still must allow for a possible strong rally attempt early in
the month before we really begin to crash. Despite the fact
that many of our key cycles are pointing down into late
October we are concerned about the Trading Index indicators.
For instance we know the Trin-5 reaches extreme oversold
territory when it rises above 6.00.Under normal circumstances
a Trin-5 reading between 6.00 and 7.00 is enough to suggest
the Dow is near some sort of short term low. Today the Trin-5
closed at 8.2 .We cannot impress upon you how severely
oversold a reading of that magnitude truly is.The Trin-5 is
one of our most reliable indicators. For the benefit of our
new subscribers it is simply a 5-Day moving sum of the daily
trading index closings. Ordinarily any reading above 6.00 is
enough to suggest the Dow is near at least a short term low.
Today's 8.2 reading is one of the most oversold readings in
several years,except for the 1997 mini-crash. The only way a
reading as severe as today's would not suggest we were near
some sort of short term low is if the Dow is beginning a
crash,or at least a mini-crash similar to that of October
1997.Now keep in mind that we do believe a crash in October
of this year will occur. The question is whether or not a
crash is about to begin right now? From our perspective the
only way a Trin-5 reading as severe as today's would not
suggest some sort of at least very short term low is if we
are beginning a crash right in this time frame. Perhaps we
are but there are reasons for us to be at least somewhat
suspicious. For instance while the Dow closed down 237 points
today the breadth showed 1910 declines to 1191 advances,not
even 2 to 1 negative. The closing breadth should be much more
negative if we are truly beginning a crash right here. During
a true crash the breadth should be at least greater than 3 to
1 negative,and probably more. We did not see that kind of
breadth today.Perhaps it will come in tomorrow but until it
does we must not become too excited about any short term
decline here. We could still see a violent upside reversal
which catches most of the shorts by surprise and causes them
to cover before we begin to truly breakdown to new lows.It is
this possibility which causes us not to jump to the short
side too aggressively just yet.
A decline below 7653 intraday anytime from here on would
be a problem for us. If this occurs and we are not yet short
we would have to go 50% short with a stop of 8254 intraday.
But we would take no more than a 50% position under these
circumstances. Also watch the Transports as any decline below
2592.69 there will be bearish,at least short term.
If there is some sort to any further sharp decline
tomorrow there is some support near 7726 plus or minus 30
points intraday in the Dow.
Our bottom line is that we are very bearish for the
month of October, looking for a decline below 6700. However
very short term we are not totally convinced the breakdown
has truly started just yet. There may be one more rally
attempt in early October before we begin to crash. We are
going to put on a 2:45 EST update for short term traders
tomorrow.
For stock traders our shorting recommendations include
American Express, MMM, Boston Scientific, Bristol
Myers, Avnet, The Limited Stores, Deere, Coca-Cola, Hewlett
Packard, Honeywell, Halliburton and Merrill Lynch. We will be
adding to that list once we are convinced the real collapse
is underway. We are releasing the names of these shorts only
for those of you who wish to study the charts on each stock
before shorting. If you have not shorted stocks before, we do
not recommend it to you here. These suggestions are only for
those traders familiar with the risk of shorting stocks. We
also want to go short the Dow Diamonds if the Dow breaks 7653
intraday. Please do not call the office to ask about the Dow
Diamonds. Call your broker and he can explain the Diamonds to
you. Basically if the Dow goes down the Diamonds will go down
and you will eventually make a profit on your position. If
you are unfamiliar with shorting stocks we recommend the
purchase of the Rydex Ursa Fund. If the market does decline
significantly in October the Ursa Fund will rise in value.
But again call your brokers and ask them to explain how the
Ursa Fund works. We cannot do so in detail here. But we want
you to take no action on any of the above until you have
talked with your broker and clearly understand how each of
the above works and what the risks are.
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