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The Broadening Top formation is a Bearish pattern. Thomas Bulkowski, in his Encyclopedia of Chart Patterns, suggests this pattern has only a 9 percent failure rate after a breakout. He mentions the average decline is 18 percent, with the highest probability decline being 10 percent. A rule of thumb for measuring a downside target is to use half the formation’s height. That measuring stick has a 91 percent success rate. This pattern appeared in the multi-year period from 1998 through 2000, just before the 1987 stock market crash, in 1986, just before the 1972-73’s 26.5 percent one-year plunge, just before the 1966 plunge, before the 1957 crash, and just before the 1929 crash. The start of the 2007 decline has already involved a mini-crash. More could come. This is a risk factor for those invested heavily in the stock market. A 10 percent decline — the most likely result according to Bulkowski — would take the Dow Industrials back down to the 11,500ish area. More decline is possible. Using the rule of thumb of half the formation’s height would target the 10,400ish area. The examples shown on the subsequent pages show declines were at least to the bottom boundary, which would target at least 8,000ish, but at lower probability. You have to think the PPT would buy markets long before that level. Any significant decline here will be a forecast of an imminent economic recession. We believe one has already started, one that won’t be acknowledged by the Master Planners until it is over. Mortgage Applications rose last week, according to the Mortgage Bankers Association. Applications are one thing; approvals are another. Collateral values are dropping and Bank Regulators have just been loosed from their cages. Here’s how it works: Real Estate loans go bad. Politicians call Bank Regulators in on the carpet, demanding to know how this happened. Bank Regulators dance while their feet get shot at, hat in hand, then return to their fiefdoms unable to sit like they used to be able to. They decide they don’t like that experience, feel they have a mandate to catch and stop bad loans, and instantly become overzealous. They schedule more frequent exams, tighten arbitrary standards, and rate good loans as substandard, and substandard loans as doubtful, and force writeoffs all over the banking world. Bank earnings take a hit — not from actual bad loan losses, but from subjective downgrading by bank examiners which requires transferring earnings into provisions for possible loan losses expense. Fearful any good loan has too high a chance of being rated as a bad loan by a bank examiner, banks put the brakes on lending. This causes a credit crunch, and sends an already weakening economy into the tank. Once the recession is publicized, public outcry demands solutions from politicians. Politicians then tell regulators to back off, after it is too late, demanding they let money flow again through the bank lending function. Where we are now, is the start of a coming credit crunch. First the subprime lenders are getting hit. Next will be all lenders. The problem is one of values. Real Estate stopped going up. The ponzi home mortgage ATM scheme of Artificial Economics has stopped. As long as values increased, everything was fine. The house of cards is now crumbling. The solution will be to devalue the dollar through massive hyperinflation. There is a debt repayment crisis coming. The Master Planners either have to goose the housing inflation game again, or hand out trillions of dollars to American Households to pay off their debts, in effect monetize our debt at the expense of a 50 percent devaluation of the dollar. The Master Planners do not realize this yet, of course, as delusion reigns for the moment. Mortgage Late Payments rose to a 3.5 year high at 4.95 percent, and new Foreclosures hit a new all-time high of 0.54 percent, according to the Mortgage Bankers Association. A soft landing here is wishful thinking.
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at that time Michael, the great prince who stands CONTACT
INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
