No Comments Written by Anthony Truong on September 18, 2008 – 7:17 pm

Apologies for the gap between now and the last US equities update – I thought it would be nice just to sit back for a short time to allow the market action speak for itself. And my word, speaking it has done!

I’ll start with a bit of gloating: in the last mini-update, dated 6 September 2008, I said:

“I continue to recommend avoiding long positions. Cash is, and will remain for some time to come, king. If you’re a risk taker, consider holding cash in US dollars; short term I expect slight weakening in the USD, but it is looking more probable that a new trend is in place to the upside. For really aggressive risk takers, you might consider shorting or buying puts on the major stock indexes.”

Anyone who has been caught with long positions these past 2 weeks would have no hair left to pull out as the roller coaster ride continues in stocks. Despite the ups and downs, all markets have lost ground significantly. In regards to the USD, as mentioned it has weakened recently as well; I continue to expect further weakening, perhaps enough for the EUR/USD to reach the 1.48 – 1.49 region, before the downtrend in this cross rate (and therefore uptrend in the USD) continues. Had any traders shorted the indexes or purchased puts, you’d be pretty happy with yourself right now. But of course, nothing I say should be seen as a trade recommendation.

Let’s recap:

- S&P500 and Dow made their all time highs on 11 October 2007.
- A leading diagonal triangle (which commonly marks the beginning of a bear market) formed from the October 2007 high to the low of 26 November 2007, before a rally up into the high of 10 December 2007 formed.
- From this high, the market crashed into the new year, bottoming on 22 January 2008. I am labelling this low as wave 1 of a larger wave 3 (i.e. a subdividing wave 3).
- A prolonged choppy rally developed subsequently into the high of 19 May 2008, which I label as wave 2 of a larger wave 3.
- Prices continued the downtrend into the low of 15 July 2008 (which I am labelling as wave 1 of a larger wave 3 of an even larger wave 3), before rallying weakly into the high of 11 August 2008.
- This is where we stand now, at the brink of destruction (essentially).

In my update of 4 September 2008, I described “count 2″ of the top 2 count potentials I was following as:

“2. Wave 2 (Wall Street chart)/wave 2 (SPX500 chart) was complete on 11 August after tracing out a double zigzag formation. The choppy price movement since has formed an initial wave 1 (both the SPX and Wall Street Hourly charts) and a interesting elongated wave 2 that has ended in a “diagonal triangle” wave C (on the Wall Street hourly chart). This implies that wave 3 (unlabelled at present) down has begun; confirmation will occur once prices drop below 11,300 in the Dow and 1,260 in the S&P500.”

Well, count 2 became the primary count definitively when 11,300 was broken in the Dow and 1,260 in the S&P500 on 4 September 2008 (the night that particular update was sent out).

So we are in wave 3 (Wall Street chart)/wave 3 (SPX500 chart) down. What happens now?

Well, as you can see in the Hourly charts of both the SPX and Wall Street, I have not labelled the past week’s market action due to the complexity of the movement. My top interpretation sees the ups and downs as many “1-2″ formations, as this wave 3 continues to subdivide. The more subdivisions it makes, the closer we get to a wave 3 in the middle of all the subdivisions, which should cause an all out collapse in prices. There are a few other counts, but I’m going to back this potential at the moment, as the evidence is pointing to a crash in the near future…

I am looking for temporary support for the Dow in the region 9,700 – 10,000, and for the S&P500 in the region 1060 – 1100. These support levels should hold the fall momentarily, but not for long as this mega wave 3 (Daily chart of the SPX and Wall Street) continues to usher in an all out deflationary crash. We will get short sharp rallies to relieve pessimistic extremes during this wave 3, but these “sucker rallies” will only serve to pull investors into long positions – thinking a bottom has been struck – before the rug is pulled out from under them again, and again, and again…

Stay tuned; we live in very exciting times.