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                               By J. Adams


                        Revised Edition: 1/19/96

                           (Original: 2/25/95)

    Recently the Dow Jones Industrial Average (DJIA) has  been  at  all-

time highs above 5000.  Based upon past stock market behavior,  there is

significant reason to believe that a top is being reached which will  be

followed  by  the  worst  crash in history.  This crash involves a total

upset  of  irrational  popular  beliefs   and   expectations   and,   in

particularly, the worldview of economists.

    According  to  mainstream  economists,  greed,  in effect,  is good.

Reigning theory holds that,  if individuals and  organizations  seek  to

maximize  utility  and  profits,  respectively,  and  there is "perfect"

competition, then, as if guided by an invisible hand,  market prices and

the  overall  economy  will  tend toward general equilibrium and maximum

happiness for all in the long-run.  The reality, however,  is that greed

is  not  good,  and,  in the long-run,  it is leading to the collapse of

civilization and maximum unhappiness for all.  In this  sense,  reigning

economic theory constitutes a dangerous extraordinary popular delusion.

    Stemming from pervasive greed and competition, market societies such

as  our  own historically suffer from general disequilibrium in the form

of persistent price instability and  so-called  business  cycles.  These

cycles  involve swings between extreme optimism and pessimism in popular

mood which, in turn,  lead to the formation of irrationally high and low

collective  beliefs  and  expectations,  respectively.  On  Wall Street,

irrational swings in prevailing expectations  are  readily  observed  as

general  cycles  in  stock  price movements commonly known as "bull" and

"bear" markets.

    Experienced Wall Street professionals have learned that the  general

ups and downs in stock prices can be predicted using technical analysis.

One  effective  approach  is based upon a contrarian investment strategy

that involves "going against the crowd"  (see  David  Dreman,  'The  New

Contrarian   Investment  Strategy',   1982).   By  paying  attention  to

"psychological indicators" like  the  put-to-call  ratio  and  polls  of

investor  sentiment,  one  can  determine  when extremes of optimism and

pessimism are being reached on Wall Street and  time  tops  and  bottoms

accordingly  (see  Martin  Zweig's  'Winning  on  Wall  Street',  1986).

Irrational extremes in consensus expectations are  indirectly  reflected

in  generally  overvalued and undervalued stock prices at major tops and

bottoms,  respectively.  Thus,  a contrarian investment strategy is also

applied  using  indicators of relative historic valuation like price-to-

earnings ratios and dividend yields (see  Dreman's  book  and/or  Norman

Fosback's 'Stock Market Logic').

    With the recent all-time highs above Dow  5000,  collective  beliefs

and  expectations  have  reached  an  unprecedented  irrational extreme.

In economics and finance this irrationality is reflected in the reigning

"Efficient  Market"  hypothesis  of stock price behavior.  According  to

this  hypothesis,   in   the   aggregate,   investors   form   "rational

expectations" of the future using all  available  information  including

lessons   learned   from  past  mistakes.   Assuming  the  stock  market

efficiently discounts investors'  rational  expectations,  stock  prices

reflect  an accurate assessment of intrinsic value based upon available,

relevant information.  Consequently,  only new,  unexpected  information

can  lead to a price change (a movemement of market equilibrium).  Thus,

stock market prices are expected to follow a random walk in  which  only

unpredictable, random shocks, i.e., unexpected news, moves prices up and


    According  to  the  weakest form of the Efficient Market Hypothesis,

stock prices fully reflect the information implied by  all  prior  price

movements.  Price  movements,  in  effect,  are  totally  independent of

previous movements,  implying the absence of  any  price  patterns  with

prophetic  significance;  investors  should  be  unable  to  profit from

studying charts of past prices.

    Unfortunately, the Efficient Market Hypothesis, like economic theory

in general, is,  for the most part,  wrong.  While pervasive evidence of

irrational   swings   in  investors'  expectations  mentioned  above  is

sufficient for undermining the key assumption of "rational expectations"

in efficient  market  theory,  a  straightforward  way  to  falsify  the

efficient  market  hypothesis  is  by  making a prediction of the future

direction of stock prices based upon historical price  patterns  in  the

Dow Jones Industrial Average.

              -Psychological Barriers in the Stock Market-

    When  the DJIA reaches thousand marks,  stock prices meet resistance

and usually head substantially lower.  For  example,  between  1966  and

1982,  the  DJIA  reached  or  slightly  breached (by a few percent) the

"Magic 1000" barrier on five separate occassions: 1966, 1968, 1973, 1976

and 1981.  Following each peak around 1000 on  the  Dow  there  was,  on

average,  a  decline  in stock prices of 34.4 percent over the course of

17.2 months.  Then,  in 1982,  the DJIA blasted through the  Magic  1000

barrier  in  a dramatic rally that marked the beginning of a bull market

that many consider still in force today.  When the DJIA  approached  the

2000  mark  in  1986,  it ran into resistance for almost a year,  and in

early 1987 the DJIA broke through  2000  in  one  of  the  most  dynamic

rallies  (in  terms  of market volume and breadth) ever observed on Wall

Street.  In 1990, the DJIA climbed to the 3000 level for the first time.

In mid-July,  the Dow closed two days in a row at what was then an  all-

time  high  of  2999.75  and  subsequently entered a sharp,  three-month

correction  of  over  twenty  percent.  The  3000 barrier was eventually

breached in 1991 with,  again,  a historically strong rally.  The  first

time   the   Dow   reached  the  4000  mark  was  in  January  of  1994.

Specifically, the DJIA reached an intraday high of 3985 and registered a

closing peak at 3978.  Following this test of the  4000  barrier,  stock

prices dropped by ten percent and then struggled with Dow 4000 for about

a  year.  In  March  of  last  year  the  DJIA  broke above 4000 for the

first time in history.  (See:  "Dow Industrials' Failure to  Break  4000

Barrier  Stiffens  Bears' Doubts" in the Wall Street Journal,  9/19/94 &

"Once Again,  Industrials Close In on 4000 Barrier" in the  Wall  Street

Journal, 2/6/95.)

    The  most  recent psychologically important thousand mark reached in

the  DJIA  is  Dow 5000.  In  November  of  last year the  stock  market

broke above 5000 and has since climbed as much as four percent above the

mark.  Likewise, the Nasdaq Composite index for over-the-counter stocks,

which  is  the second most widely watched stock average nowadays,  broke

the 1000 mark for the first time in history last July and has since been

struggling.  What seems to be takng place is a euphoric top  similar  to

the peak in the DJIA some five percent above 1000 in 1973; this peak was

followed  by  the  worst  bear  market  up  to that time since the Great

Depression.  All in all, based upon prior price declines following peaks

at or above thousand level  psychological  barriers  in  the  DJIA,  one

should  expect  at  least a thirty percent drop in stock prices over the

next year or so.

                -The Dow Theory of Stock Price Movements-

    Based upon "Dow Theory",  one can be relatively confident  that  the

DJIA  is  currently  reaching  a  peak above the 5000 mark and will soon

enter a major correction.  Dow Theory  holds  that,  if  the  Dow  Jones

Industrial   Average  reaches  an  all-time  high  when  the  Dow  Jones

Transportation Average and the Dow Jones Utility  Average  do  not  make

all-time highs, then there is a "non-confirmation" and one should expect

a major price decline and sell their stock holdings (the actual buy- and

sell-signal is a little more involved then that, but "non-confirmations"

are the key prerequisite for such signals).  (Notably, the reason charts

of the Dow Industrial,  Transportation and Utility Averages are  printed

together  in  the  Wall Street Journal each day is to apply Dow Theory.)

If, between 1897 and 1981, an investor had bought and sold the stocks in

the DJIA with each Dow Theory buy signal and sell signal,  respectively,

then  they  would  have  achieved  a  return  almost nineteen times that

attained from simply buying and holding (see Martin  Pring's  'Technical

Analysis Explained' (1985), p.21).

    A textbook example of Dow Theory non-confirmations occurred when the

DJIA  peaked at 3000 in July of 1990.  The Utilities reached an all-time

high in 1988 and the Transports topped-out in August of 1989.  With  the

record closing peak in the Industrials at 2999.75 in 1990, the Utilities

and  Transportation  indexes  were no where near new highs.  Thus,  soon

after that a sell signal was registered  that  correctly  anticipated  a

twenty percent decline in stock prices.

    With  the  current  all-time  highs  being reached in the DJIA above

5000,  there  are  new  non-confirmations suggesting a sell signal.  The

Utilities  last reached an all-time high in October of 1993.  Meanwhile,

the Transportation index recently reached an all-time  high  well  above

the  2000  mark,  but  since  then  the  index has pulled back while the

Industrials  remain  at  record  heights  above  Dow  5000.  Thus,  non-

confirmations  are taking place that suggest a Dow Theory sell signal is

near  that  historically  has meant a  major  decline  in  stock  prices

(actually, a sell-signal was  registered  the  week before last, but one

last  unconfirmed  another high in the Industrials can not be discounted

at this time).

          -The Elliott Wave Principle of Stock Price Movements-

    The potential scale of a future decline in stock prices following  a

peak above the DJIA 5000 mark and a new Dow Theory sell  signal  can  be

predicted  with  the Elliott Wave Principle.  The Elliott Wave Principle

holds that stock prices move in repeating,  fractal-based wave patterns.

Based upon these patterns, Robert Prechter, the 'Elliott Wave Theorist',

predicted  in  the late-1970's and early-1980's that a major bull market

in stocks was due that would carry the DJIA to a "Grand Supercycle"  top

which  has  been  at least 200 years in the making.  Following the final

peak, Prechter warned the 'worst crash in U.S. history' would occur.

    Even though the bull market has lasted longer than Prechter expected

and  the  DJIA  has gone higher than first projected,  the indication is

that the final high is now being reached.  One  interpretation  is  that

the huge Grand Supercycle rising wave pattern is completing with a final

"fifth wave breakout" above a Supercycle upper channel  line  which  has

been  marking  key  Elliott  Wave tops in stock prices since 1937.  This

upper channel line,  which was breached last spring when the Dow climbed

above 4200,  can be seen on a logarithmic chart of the DJIA by drawing a

line through the 1937 peak at 194, the 1962 peak at 735, the 1987 top at

2722 and the 1994 closing high of 3978.  As the Wave Principle predicts,

this Supercycle upper channel is parallel a lower trendline that can  be

drawn  through  the 1942 low at 94,  the 1974 bottom of 572 and the 1982

low at 777 on  the  Dow.  One  should  note  how  the  upper  and  lower

Supercycle  channel  lines  are almost perfectly parallel,  an important

pattern predicted by the Wave Principle.

     One of the main reasons to believe the Grand Supercycle peak is now

being reached above the Supercycle upper channel line and  Dow  5000  is

because  the  current  high  point  in stock prices is coinciding with a

couple  of major planetary alignments.  Each of the Elliott Wave turning

points at the Supercycle upper and  lower  channel  lines  listed  above

occurred around the time of rare planetary alignments.  Similarly,  when

the DJIA broke above 5000 last November,  there was a tight alignment of

seven  planets,  and  today the Dow closed near a record high going into

another   tight   seven-planet    alignment    this    weekend.    Thus,

"astroharmonics" indicate we are currently reaching the Grand Supercycle

peak with a significant alignment of the planets.

    If,  indeed,  we are currently around the Grand Supercycle  peak  in

stock prices above the Supercycle upper channel line and Dow 5000,  then

an historically unprecedented  crash  is  near.  Given the scale of  the

relevant wave patterns,  this crash would be the opening phase of a bear

market for stocks that could last upwards of a century and involve a 99%

decline  in  the  DJIA  (for  more  information,  contact  Elliott  Wave

International  in  Georgia  or the Foundation for the Study of Cycles in


                 -An Inefficient Market Hypothesis Test-

    All  in  all,  the  implication  of historical price patterns in the

stock  market  is that the worst crash and bear market in history should

follow the peak currently being reached  above  DJIA  5000.  Based  upon

psychological  barriers in the DJIA,  Dow Theory non-confirmations,  the

Elliott Wave Principle and astroharmonics,  there is substantial  reason

to believe that a major, unprecedented decline in stock prices is close-


    If the expected decline occurs, then this will significantly falsify

the  Efficient Market Hypothesis and undermine reigning economic theory.

Furthermore, this crash will demonstrate the inefficiency of markets and

how greed and competition result in the worst of all possible worlds  in

the long-run.  Thus,  faith in an imaginal invisible hand is a dangerous


    While  the anticipated crash will upset the worldview of economists,

it also implies an upset of prevailing popular opinions.  Indeed,  since

general  swings  in  stock  prices  reflect  swings in mass mood between

irrationally  optimistic  and   pessimistic   collective   beliefs   and

expectations,  the current,  unprecedented peak should involve the worst

popular delusions imaginable.  Indeed,  one such delusion is that a "New

World Order" of East/West peace,  friendship and cooperation is at hand,

when,  in fact,  there is substantial  reason  to  expect  a  new  world

disorder  and  global war.  While the approaching war will upset popular

expectations and surprise the modern "secular" world,  it shall  fulfill

biblical  prophecy  and thereby verify religious truth and the wisdom of

faith in God (see the articles on my web page).