Coming Stock Market Crash Can Be Seen in This One Chart

Comprehensive technical analysis of the Russell 2000 index shows how the coming stock market collapse will take shape.
By Ken Goldberg ,

Over the past few months, the decision support engine has been tracking several stock market indices that are not confirming the higher high in the Nasdaq 100, an index that is dominated by a few huge tech stocks and is easy for big players to manipulate. In particular, the Russell 2000 I:RUT appears to be the stock index of the people, as it is difficult to manipulate and is most representative of the average American's investment portfolio.

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As we often remind readers, Ralph Elliott's theory of crowd behavior (a.k.a. Elliott Wave theory) posits that news will eventually arrive to justify the technical forecast. This monthly bar chart of the Russell 2000 index shows that an ominous, rolling top pattern has been building since early 2014, when the stochastics began making a series of lower highs while prices were making higher highs into June of this year. The bold blue lines pointing up across the higher price highs and down across the lower stochastics highs show what is known as a bearish divergence sell signal. It only occurs at very mature uptrends, and very mature downtrends (with opposite conditions). Having just occurred for the first time since the 2009 low, when stocks were at all-time highs, the objective conclusion, until proven otherwise, is that a major top was made in June! Since then, the Russell has fallen in an orthodox, five-wave decline (into the Sept. 29 low), and has risen in three waves, to a lower high, on Nov. 6, to 1200 (which was also a test, and failure, at the underside of the 200-day moving average, an institutional resistance level). This level is halfway between the Fibonacci 50% and 62% retracements of the prior decline from the June high.  

This five-down, three-up pattern suggests that either all of the bounce off the September low is complete, or the first bounce of a larger up/down/up bounce is, and the decline into this Monday's low is the middle, down part of that bounce. Under this second scenario, a final rise toward 1225 would be on the docket in the coming three to five five weeks. Then, the next decline along the red arrow's path would be expected. So, either the reversal from 1200, in the past week, is the beginning of several months of sharply lower lows and lower highs (along the red arrow's path), or a failing test of 1225 will catalyze the exact same outcome that may have begun last week. This leaves us wondering what news will arrive between now and mid-December that might justify the forecast that the red arrow's path anticipates.

With this kind of price risk now visible, the forecast is currently the path of the red arrows. Therefore, the decision support engine warns that immediate, protective action must be taken to ensure the survival of your portfolio. You should place sell stops at 1110, because if the Russell goes below that level any final thrust toward 1225 is likely to be eliminated. If the opportunity presents itself, selling into 1225 would be an even better exit. That said, investors should avoid playing any potential upward finale toward 1225. Only the most nimble and experienced traders can deploy capital for a 6% move, capture profits and have the self-control to exit when the party is raging.

Avoid the rush, take your money to the sidelines, and laugh all the way to your bank's Web site, where you can watch your capital maintain its value, while others watch theirs dwindle in the coming years. 

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This article is commentary by an independent contributor. At the time of publication, the author held a short position on the Russell 2000 index.

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