No Comments Written by Anthony Truong on September 30, 2008 – 2:32 pm

Well, need I say anymore? I believe the intensive media coverage of last night’s market action should be sufficient in terms of the implications of the failed bailout bill.

Also note that Congress approved a $25 billion bailout of the US auto industry, through the guarantee of loans, but you won’t be hearing much about that. Nor about the $630 billion that the US Federal Reserve just pumped into currency exchange programs with other central banks to increase the supply of US dollars.

Oh and an after-thought: Wachovia was taken over by Citigroup, with the backing and support of the Federal Deposit Insurance Corporation (FDIC). Wachovia has/had over $300 billion in loan ‘assets’, which Citigroup will be acquiring; however, Citigroup managed to negotiate a deal so that it would ‘only’ be exposed to losses of $42 billion on Wachovia’s assets, and anything beyond this figure will be absorbed by the FDIC. In exchange, Citigroup has gifted the FDIC with $12 billion in preferred stock and warrants.

Historic day indeed, which may forever be known as ‘Black Monday’ of 2008 (as per a headline on the New York Times website).

Please digest the following quote:

“On Wall Street, the drops were sharp and swift, catching many investors and stock strategists on Wall Street by surprise.” (’Dow and S&P 500 close with dramatic falls after House vote‘, by Michael M. Grynbaum, Monday, September 29, 2008, New York Times)

Perhaps it did catch Wall Street by surprise, but guess who wasn’t surprised? Yes dear reader, YOU weren’t surprised at all, as you all received a ‘high alert’ warning email on Friday 26 September that emphasised the ‘high’ probability of a collapse in the markets. You were told to “be prepared for some serious downward price movement.” I don’t know about you, but the Dow closing at its biggest ever one day point loss seems like a “serious downward price movement“.

OK enough gloating, 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.
- The “great drop” appears to have begun in earnest.

I have re-attached some charts from 25 and 26 September (below), to show you how accurate Elliott Wave analysis can be when you can recognise the patterns.

Please view the charts below from today (30 September) to see how things have panned out over the past few days.

I think wave 3 of wave 3 (of a larger wave 3) has finally started to rear its ugly head. It should be one bumpy ride down.

****Please note that I rushed the labelling somewhat on the Wall Street (Hourly) chart of 26 September when it was first sent out; due to the urgency of the Congressional bill (and the volatility it would have added to the markets), I numbered the waves so that they were ‘fudged’ to fit the timeframe. As you can see in the 30 September charts of Wall Street above, markets made a slight high above that of 25 September (11,134), but still remained in my previously cited resistance area (11,100 – 11,200) – the new high was 11,196. As a result of this, I have now re-labelled the Hourly chart properly, accounting for all the waves. I apologise for rushing the count (it won’t happen again!), but hey, had I not sent out the ‘high alert’ email, you would have been oblivious of the downside potential in markets.

It’s worth mentioning that although the count was also off in the SPX500 chart, the S&P500 did not manage a new high above that of 25 September (1,223.6), but the count is identical to that of the Wall Street chart, only the ‘c’ wave is slightly truncated.****

I must emphasise that equities have much much further to go south, so please do not take unnecessary risks with long positions; no one should be holding any long positions period.