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Is The Top In, or Still to Come? (December 5, 2006) Frequent contributor Jed H. recently sent in two interesting links, one making the case for a recession in 2007 and the other describing a "market top" formation in the Dow Jones Industrials: The SafeHaven link below has some USA MKT / DJIA Charts and a "Megaphone (TOP) Pattern" (which is a FRACTAL Pattern), which seems to form at MAJOR MKT TOPS.Please take a look at the megaphone charts. If this analysis is correct, then the smart move would be to exit the market before the crash. A panic for the exits will undoubtedly occur at some point, and the question of "when" will only be decided in hindsight. The Dow Industrials are Wrapping Up a Pattern Similar to 1929 (11/3/06) Recession Looms for the U.S. Economy in 2007 (Center for Economic and Policy Research) 
Thank you for the links and for the question, Jed. For what it's worth (no more than your own opinion, to be sure), here are my thoughts. 1. Charts cannot predict the future. Charts can indicate likely scenarios and trends, but trends can be broken even when few expect the break. 2. Nonetheless, charts are all we have. Glancing at this chart I posted on 12/1, what I saw was a head and shoulders top. However, if the market rallies, it could go back to the 12,360 level and form a double top--another topping pattern. Or, it could run up to 12,500 or even 13,000 in a new high. Or, it could fizzle at 12,300 and then descend. 3. There's two wild cards the Plunge Protection Team cannot control: the dollar and foreign investors' holdings of U.S. equities. The dollar remains in a slow-motion freefall; the big victory today is that it didn't drop any further. As I have mentioned here recently, there is an extraordinary complacency in the equity and currency markets; few seem worried that the dollar could drop below 80, or that the consequences of this weakness might actually prove serious. When complacency reigns supreme, the odds of a disruption increase. Recall the currency markets trade $2 trillion every day; if the dollar breaks down, no amount of intervention will stop it. Even the Japanese don't have that much money. 
Foreign holders of dollars, U.S. bonds and equities are losing billions with every downtick of the dollar. Yet Americans, at least those writing in the financial media, are supremely confident that non-U.S. investors and central banks will continue funding our profligate lifestyles and global ambitions regardless of their losses. If I were a non-U.S. investor/banker, I would be frustrated in the extreme with this careless reliance on my forebearance, and I would be tempted to let the dollar drop below 80 (or cause that decline with some judicious selling) just to fire a warning shot across Washington's bow. Recall that owning stocks and bonds is also a bet on the dollar. Foreign holders of stocks and bonds may decide to get out while the getting is good, and sell their U.S. equity holdings before the dollar drops any further. No amount of hedge fund money could countermand such a flood of selling. 4. The VIX (volatility index) remains at record lows. While it is possible for this index to continue down to ever-lower levels, the odds get longer with every passing day that a spike of (unexpected) volatility might appear. 
5. Nothing has worked as expected this year, so the Santa Claus Rally might yet be a victim of this anti-trend year. A very long history suggested that an important 4-year low would be reached this October (yours truly expected this to hold to historic patterns). Instead, the market ran up in a most contrarian fashion throughout October. Some feel the 4-year low has been postponed, and if this year is indeed contrarian, what better time for a breakdown than smack dab in the highly anticipated December Santa Claus Rally? 6. The cliche is that the market always acts to inflict the greatest possible damage on the greatest number of participants. A sharp downturn right now, when virtually everyone expects a continued rally through the end of the year would fit that bill exactly. Technically, the argument can be made that today's strong rally returned the indices to their uptrends. This may turn out to be true; it's also possible this rally will return to the previous high and reverse, forming a double top. Or it could plummet unexpectedly, and break all those warm and fuzzy expectations of Santa Claus enriching everyone who believes in him and his "guaranteed" year-end rally. 7. The 4 billion share volume last Thursday, 11/30, was a little-noted line in the sand. Please scroll down and read my 12/1 post for more on volume analysis. If I am correct on this, the uptrend broke on 11/30, and will not find its legs; the enormous volume on that down day fractured the uptrend, even if no one seemed to hear the snap. Though I cannot provide you with any persuasive evidence, I would not be surprised to see the market perform an unexpected swan dive in December, recover in January for one more splendidly irrational move higher, and then fall into the severe crash Jed H. described. We shall see. It's a good juncture to recall the ancient Chinese curse: May you live in interesting times. Indeed.... I remind readers that I am long gold (calls) and short the DJIA (puts). I may have my head handed to me on a platter by the market, so for goodness sakes, make your own investment/speculative decisions. NOTE: According to my web logs, the 400,000th visitor of 2006 happened upon this humble site today, and I want to thank each of you who has taken the time to stop by. I hope you have been informed and/or amused; and if not, please check in another time. We aim to surprise. For more on this subject and a wide array of other topics, please visit my weblog. 
copyright © 2006 Charles Hugh Smith. All rights reserved in all media. I would be honored if you linked this wEssay to your site, or printed a copy for your own use.
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