These Charts Show What the Coming Stock Market Crash Will Look Like

These charts of the Russell 2000 (^RUT) stock index show how the coming stock market collapse will take shape. Ignore them at your peril.
By Ken Goldberg ,

Ever since the 2008 crash, when things were so desperate that the crowd believed anything was worth trying in order to stem the damage caused by the financial crisis, our markets have become more and more manipulated by the use of derivatives, which were thought to have been one of the chief causes of the crisis in the first place.  

Nothing is more rigged for manipulation than the Dow Jones Industrial Average, where each $1 move in one of the average's 30 stocks causes a 6.68-point move in the index. As if that weren't enough, the keepers of the DJIA regularly take out the companies that are dragging the index down and add the companies that are believed to be certain to rise in the future. This has turned the once-hallowed measure of America's industrial prowess into little more than a Vegas-style game of chance, where the house is the Federal Reserve, and the dealers and pit bosses are the heads of the too-big-to-fail financial institutions. Where, oh where, is Glass-Steagall?

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All is not lost, though, as some indices are, so far, too broad to "game." One of these is the Russell 2000 I:RUT . Above is a monthly bar chart to give perspective to what the past four years has witnessed. The red arrows show the path for the coming couple of years if this year's highs ended the entire rise. If not, 1350 could be briefly probed and a 1929 analogue could come into play. Such a scenario was discussed here in late October. Notice the bold blue lines that point in opposite directions in the price and stochastics panes. This is called a bearish divergence sell signal, and is one of the historically repeating cause/effect patterns that the decision support engine's hunter/seeker algorithm alerts us to.

The weekly chart below shows what has really been happening since this year's all-time highs in most investors' portfolios. As illustrated in the pink box in the center of the graph, a five-wave impulsive decline can be visually identified. This suggests the uptrend has ended, since at least the 2011 low, when the last five-wave impulsive decline ended at one degree of trend higher than this current decline, which sparked the four-year rise that just (potentially) ended.

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Since the August low, the bounce has taken on a familiar up/down/up structure, which is a common pattern seen in corrective moves. Once these end, the direction of the last impulsive decline usually resumes. In this case, the red arrow on chart two should guide price lower. Even if the intervening blue arrow, from near 1125 provides another relief rally, the red arrow returns and points lower, toward the 900s.  

This week would provide an ideal timing window for the bounce to end, as the rise off the September low is five weeks old now, compared to the 14 week decline into August, which creates a two-thirds to one-third relationship. If the sequence continues, the next decline would project out 22 weeks, or into the middle of February. This also aligns with the lower right=hand corner of the pink box in chart two, and into the higher green box in chart one, both in price and time. The red line in chart one, drawn from the swing high of July's 1278 reversal, is the line in the sand where the bears would retain control. Above that level, the 1929 analogue would be active.

More likely, however, either the red oval in the yellow box at the right of chart two will halt the entire rise off the September low near 1080, or the red oval in the pink box at the right of chart two will. The center points of both of the red ovals are only 25 points apart, suggesting 1215 +/-15 is a high value target for an important peak/reversal in the next few days to weeks. 

Therefore, the decision support engine suggests the following protective actions for those with profitable long positions. If you're long, use sell stops at the 1180 low of Thursday. Breaking that level would imply a test of the 1125 zone (mentioned above), where the lower two-standard-deviation band (containing 95% of normality) will attempt to halt falling prices. If there's a pop toward 1215, raise your sell stops to 1200 for protection. If you're flat, these parameters should be used to consider short exposure.  

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This article is commentary by an independent contributor. At the time of publication, the author held shares of Direxion Daily Small Cap Bear 3X Shares (TZA).

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