That Big Expanding Triangle!

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

As was expected, at least in this corner, the Fed has decided not to “taper” its bond-buying program known as QE3 of $85 billion a month. The reasoning here was that while there was improvement in the US economy the economic numbers remained consistently weak and did not justify the Fed “tapering” at this time. The Fed effectively pulled the rug (or was it the football) right out from under a market that had widely predicted that the Fed would “taper”.

At no time did the Fed say it would “taper” beforehand. The Fed consistently had noted that if conditions warranted it they could consider “tapering” the current $85 billion bond-buying program. Many including the financial media had run with the Fed’s previous statements that they would “taper” and the market had started to build in at least a $10 billion “taper” at the September FOMC.

The reaction in the market was immediate as gold leaped $70 from the lows of the day (in the cash market as futures close at 1:30 pm), the US$ Index fell 90 basis points and the US stock market soared to new all-time highs. It certainly put an edge of volatility into the markets. Several weeks ago, COTW showed what appeared to be a huge expanding or broadening triangle for the US stock market. It suggested at the time that the US stock markets had room to move higher within the context of the triangle. The Dow Jones Industrials (DJI) could reach as high as 16,000 to 16,500. Given that the markets today did breakout to new highs those objectives now appear to be coming more into focus.

While new highs for the DJI up to 16,500 could happen, it should be noted that achieving this lofty level should not be a reason to get excited and cheer. A broadening triangle pattern is rare and if it does occur it normally is not seen over such a long period of time. This pattern saw its first peak in 2000 (A) followed by the initial bottom in 2002 (B) followed by the huge 5 year rally that topped in October 2007 (C) then the 2008 financial crisis crash (D). The current rally that got underway in March 2009 could soon make its final top (E).

A bearish broadening or expanding triangle would normally break down through the bottom of the triangle and have objectives that could in theory equal the widest point of the triangle. In this case, that would be D to E. This scenario could result in a complete collapse of the DJI. Some technically analysts such as Robert Prechter of Elliot Wave International and Robert McHugh of McHugh’s Market Forecasting & Trading Report have long been forecasting a potential final top to the current Grand Supercycle and that it could culminate in a huge financial collapse. This appears to fit their model.

Robert McHugh has called the current pattern the “Jaws of Death” because it has the look of a shark with his mouth wide open. McHugh has noted in the past that the “Jaws of Death” or expanding or broadening triangle has been seen at other important highs. In an article dated February 17, 2012 entitled A Massive Stock Market Top is Finishing Now: The Jaws of Death Pattern Forecasts a Coming Crash noted a number of previous tops. The broadening or “Jaws of Death” pattern was seen prior to tops in 1929, 1957, 1965-1966, 1972-1973, and 1987. A broadening top seen over several weeks or months might not be unusual but seeing one that has been forming for 13 years; (2000-2013) is quite unusual.

While it is conjecture on McHugh’s and Prechter’s part that the markets could collapse to 1,000 (or worse) for the DJI the pattern appears to suggest as a minimum that it could once again collapse back to the bottom of the pattern. That would suggest a decline to around 6,500 by 2016 given past patterns of 2 years down followed by 4/5 years up. If the bottom of the triangle were to break then at a minimum the DJI could fall to 2,200.

So when could the final top take place? The markets are approaching the period of the 2002 bottom and the 2007 top. Recall that the 2000-2002 bear market bottomed on October 10, 2002 and the 2007 top made its top on October 11, 2007 five years apart. The first crash low of the 2008 financial crisis made its low on October 10, 2008 although the final low was not seen until March 6, 2009. As well the markets made a lower secondary top on October 5, 2012 prior to a drop that took the market into mid-November 2012 for a low. Could there be a confluence of events that see the market once again top in that October 5 to 10 period this year? If the DJI were trading somewhere between 16,000 and 16,500 at that time then there is the possibility that a top could be seen.

Would that be the final top and the market crashes from there? Tops can play out over time and the market might well pull back before making another attempt at the highs or even once again see higher highs. However, as long as the DJI remains at or below that upper channel of the potential broadening top then odds favour that a major top could be forming. The market would not fall straight down either. While the market crashed in 1929 a recovery did get underway that lasted until May 1930 before they embarked on a long decline down before making its final bottom in July 1932. The 2007 market topped in October but the final low was not seen until March 2009.

Key would be to watch weekly lows. The current weekly low to watch is at 14,700. Once the markets take out a previous weekly low a bear market could well be underway. Breaking a previous monthly low would be more bearish and finally breaking the previous year’s low could prove to be quite bearish.

As to whether the broadening pattern is signalling that a major bear market decline could get underway remains to be seen. As noted a decline to the bottom of the broadening pattern could be the minimum result objective of any bear market. A drop of that magnitude could take two or three years before it is completed if previous bear markets since 2000 are any guideline. I would have to leave even more bearish predictions up to Prechter and McHugh. The “Jaws of Death” may yet be foreshadowing a major collapse. The cause? It’s the debt “stupid”.