Stocks Plunge: What is Going On?

Where do I even begin. Thursday, May 6th, saw the single largest daily decline in the history of the U.S. Stock Market. But, even more amazing is that most of it occurred in a matter of 10 minutes, between 2:40 and 2:50 pm EST. During that ten minute period, the Industrials fell approximately 600 points. It was a scary drop, an all-out panic attack, a stock market crash free-fall where bids were absent, and selling pressure was powerful. At the bottom, the Industrials had fallen 1,010 points Thursday. Then deep pockets intervention appeared and bought markets hard, stopping the dive, and driving prices higher.

The previous greatest single day decline was 780.87 points on October 15th, 2008, inside a multi-week stock market crash. Even though there was a 600 point bounce into the close Thursday, the Industrials and stock market still ended the day down substantially. The Industrials closed the day down 347.80 points, or 3.2 percent, the largest closing drop since February 2009, over a year ago. The selling continued Friday, the Industrials falling another 140 points after being down over 200 intraday. The Industrials, S&P 500, and NDX are now all down for the year 2010. If you missed the rally from February, you didn't miss anything.

There was a lot of chatter from the cheerleaders in the mainstream financial media suggesting that the decline was a computer glitch of some sort, a mistake by a large seller, a fat finger, or a bunch of other nonsense reasons. The truth is, Thursday saw all out selling panic, the fourth 90 percent down day in two weeks, a situation we also saw before the stock market crash of September 2008 through November 2008. We mentioned this warning in Tuesday's newsletter to subscribers, before Thursday's debacle. Thursday's drop was predicted by the stock patterns, and came a day after our DP/SP indicator generated a sell signal, and occurred with our key trend-finder indicator on a sell signal. No surprise, the technical analysis we have been showing in these pages warned of a coming sharp decline. Further, the stock market had strong downside momentum before the 10 minute collapse late Thursday. The Industrials were already down over 300 points before the 2:40 to 2:50 pm EST collapse. Panic selling was already starting before any so-called computer selling technology issues kicked in.

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Both the NYSE and NASDAQ reported that there were no technology issues from the exchanges that affected the plunge. That said, both the NYSE and NASDAQ decided to cancel trades that moved 60 percent or more above or below the last printed prices at 2:40 pm EST. There was clearly some serious bizarre trading in many stocks, as sell orders were generated with little or no bids, allowing some stocks with illiquid market-making to fall dramatically. The market became extremely inefficient. This demonstrates the fragility of markets at this time, that something like this could happen, and should have a destructive impact on confidence in markets, especially from retail investors, who are feeling more and more alienated from the volatile nature of markets, and the corruption on Wall Street.

As the week progressed, fears of Europe's economic woes spread like a contagion. Riots continued in the streets of Greece. It is becoming obvious that sovereign insolvency is a growing possibility in many nations, as deficit to Gross Domestic Product ratios, and debt to GDP ratios threaten the foundation of western economies.

The internals of the market worsened this week. New 52 Week Lows rose substantially above the 85 we have been warning about as a barometer for a potential crash. They came in Thursday at 218. We did not get a Hindenburg Omen observation Thursday because the number of New Highs were insufficient. We need both New Highs and New Lows to be more than 2.2 percent of total NYSE issues traded, which is about 70. We came close to getting one Thursday, as New Highs were 52. We will report any news of a Hindenburg Omen to subscribers in our Daily Market reports at www.technicalindicatorindex.com

Thursday's decline didn't even put a dent in the overbought level of the weekly Full Stochastics, although they are now solidly on a sell signal. This suggests we are going lower over coming weeks.

The Wilshire 5000 Index, which is really about 6,000 stocks, is essentially the entire U.S. listed stock market. This index tells us the U.S. stock market has lost $1.0 trillion of value over the past two weeks. All the gains over the past 5 months have been wiped out in the past two weeks. It took just two weeks to destroy months of gains. The big picture patterns have been warning in spades that something is very wrong with all major stock markets and economies globally. We are now starting to see the details and news unfurl which technical analysis showed the markets knew was coming. And it is not over. More danger lies ahead. That does not mean a bounce cannot occur from time to time, but patterns are warning that there are serious risks to economies and global stock markets, dangers that could wipe out 80 percent of more of the value of stocks over the next several years.

Which brings us to Gold. Gold is inches away from setting an all-time new high. We have a substantial position in Gold in our conservative portfolio. What we are now seeing, which is fascinating, is Gold is beginning to replace fiat currencies around the globe as the world's reserve currency
Euros are being sold by the busload in exchange for Gold. We have been tracking patterns in Gold for several years which suggested something like this was going to happen. We also have a concentration of U.S. Treasuries in our conservative portfolio. Well, Treasuries are doing very well as this crisis continues to unfold. U.S. Bonds rose 3 points Thursday. The yield curve is flattening again, which is often a sign of a coming economic slowdown. European countries are going to have to raise taxes and cut spending, a plan of austerity which will reduce aggregate demand globally, and exacerbate a worldwide economic slowdown.

It is highly likely that Catastrophic Supercycle degree wave (C ) down has started.

How are our indicators doing? Well, since the PPI generated a sell signal on April 16th, the Industrials fell 1,149 points, or 10.4 percent. Sell signals in the 14 Day and 30 Day Stochastics have been followed by declines of 9.7 and 10.2 percent. The very next day after our Demand Power and Supply Pressure Indicator triggered an Enter Short signal, we saw Thursday's intraday stock market crash. Recent sell signals in our NDX key trend-finder indicators have been followed by 12 percent declines in the NDX. The recent sell in the RUT's PPI on April 30th has seen a subsequent 11 percent decline.

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