Here is a long term point and figure chart of the cash S&P 500. All the markets are closed today in the USA but the e-minis did trade on globex this morning until 11:30 am New York time. They will reopen this evening. In Europe massive amounts of selling came into the market and drove the e-minis down to 1256 from their 1325 close on Friday. This brings the drop over the past 6 trading days to about 12%. This kind of decline certainly qualifies as a crash.
Where will it end and what are the prospects for the next 6 months?
In any market situation the first thing to do in developing a prognosis is to look for historical analogies. I think the best analogy for the current situation is the July-October drop in 1998 which carried the cash S&P down from 1188 to 923, a drop of about 22.3%.
I have three basic reasons for liking this analogy.
First, the 1998 drop was a very fast one, just like the current decline. The S&P dropped 22.3% in only 10 weeks. By way of contrast, it took the S&P about 11 months to drop by the same percentage from its 1553 high in 2000.
Secondly, the 1998 drop occurred against the backdrop of great financial uncertainty: the Russian bond default and the Long Term Capital Management meltdown. Today we have the worldwide subprime meltdown, fears of a credit crunch, and fears of a recession.
Finally, 1998 occurred as the "interim crash" segment in James Alphiers phase theory
These segments are generally very fast but relatively brief declines which are part of a world wide panic over some unexpected event. The market's behavior over the past three months fits this description exactly.
If the 1998 analogy is correct, then a drop to the 1224 level in the cash S&P would be the expectation for this decline. On the chart you see above I have pointed out two other indications of support near that general level. The bottom of the second 170 point box down from the 1576 high stands at 1236. The 2 x 1 trendline rising from the 770 in 2002 now stands at 1190 and rises at the rate of 10 points every two columns.
These factors make it likely that the drop from the October 11 top at 1576 is nearly over. A typical sequence would be a quick rally of 100-130 points from this morning's low, followed by a drop which will end somewhere in the 1200-1260 zone. After that final leg down I shall be looking for a new bull market to begin. If the 1998 analogy holds, it will take only a few months to move above the 1576 high. On the other hand, the move up from the 1998 low lasted only 17 months. A similar rally from the upcoming lows would produce a market top in 2009, just about the time we would be looking for the end of the Alphier phase and the top of the 4 year cycle.