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Important: see "My Trading Rules" at the foot of this article.

On the morning of the 15th February I wrote to Chart-Guide.com subscribers that the price action of the US markets on Valentine's day, had been "unequivocally bearish". The evidence that stock markets world-wide have topped out big time continues to grow.

What I really want to do today is repeat the warning that this is going to be no ordinary top. Take a look at that chart above. From the 1932 depression low of 40.5, the Dow rose to a high in 1966 of 1001.1, approximately a 25 fold rise in 34 years, a very common Fibonacci number. Then we had the late 60's/ early 1970's bear market, during which the markets made a new high. Yes, that can happen even though a bear market has started. (That's why I haven't stopped forecasting a major bear market even though the Dow has risen above its 2000 all time high.) From the 1974 low to the October 2007 high, the market rose from 570 to 14198.1, another 25-fold increase, in 33 years - the same ratio in roughly the same Fibonacci time. The Dow fell nearly 50% from the 1966 high to the 1974 low. It would be quite normal for it to do so again now that it has repeated the same move: a similar move would see the Dow fall to 8000 - effectively back to the lows of the 2000 - 2002 bear market. Now have a look at the MACD indicator - although the Dow has made a new high since 2000, the MACD is much lower, and is crossing over to point down That's bearish divergence, and it generally marks the end of a trend. It means that the upside is weaker than before. Look how the Dow has broken out of the top of the trend channel, and is now crawling up the upper line, trying to maintain the breakout. If it falls below the upper line again, it will be back in the trend channel, and likely to fall to the lower line - so a target of 8000 isn't too wide of the mark - maybe even 5000 before we reach the lower line.

Here's that upper line on the weekly chart. A move below 12,000 will see the Dow back in the 70-year trend channel. Note how the price action has been observing that line as support or resistance since the 2000 top. The 9/11 plunge bottomed right on it. So 12,000 is key support. I don't see it holding. If it goes, it will open up 10,000 as a target. We might get there surprisingly quickly. Why? Because the market is inflated by debt. There are hedge funds out there controlling trillions of dollars, all of which is leveraged up by anything from 3 to 20 times. These are the same guys who've already lost billions of dollars in sub-prime exposure. Do you think they're any better on the stock market? If you have leverage, there is a line in the sand below which your shares must not go, otherwise your banker calls you and asks for more cash on deposit, and your investors ring you up wanting to take their money out. Trouble is, if you're leveraged 20 times (and a lot are), to raise $1m you have to sell $20m worth of stuff. The hedge funds all use similar market models. So they've all gone for the same stuff (like sub-prime debt). So if these lines in the sand are crossed, they're all going to have to start selling the same things.

One of the things I hear people say against this is that P/E ratios are conservative today. Yes, but the quality of the earnings is totally different. The majority of these company earnings has come from easy credit and mortgage equity extraction. So they're very likely to collapse suddenly: just like Northern Rock. Earnings which are generated by credit-fuelled consumption do not deserve any rating because they can disappear so quickly. When the money runs out, the spending stops. Just like that.

But the Fed is lowering rates, you say. Yes, but it's not working, and it won't work. The credit crunch is quite outside the control of the Fed or the Bank of England, because no-one knows what the bottom line of bad debt is. We haven't even scratched the surface yet.

My old colleague from Hemscott days, Tom Stevenson, recently reported the 2008 edition of Barclays Capital's influential "Equity Gilt Study", written by strategist Tim Bond. There are a lot of interesting facts here: for example, cash was the best performing asset in 2007 for the first time since 2001, and it's the first time since the depression decade from 1927 to 1937 that equities have underperformed rival assets over such an extended period.

Next, equally important, news that the Fed's rate reductions are not stopping the credit crunch from deepening and worsening: in fact, defaults in the US housing market are spreading from sub-prime to the much larger stock of top-grade housing debt, threatening to set off a wave of even bigger losses for banks and investment funds. According to this report, the iTraxx Crossover index - a risk barometer that measures default insurance for Europe's low-grade bonds - recently rocketed to a fresh high. It is now above the extreme levels seen in August and November, despite the Fed's virtually unprecedented rate reductions since then. According to this report, Willem Sels, a specialist at Dresdner Kleinwort, said "This crisis is not going to stop at mortgages. It is spreading to credit card debt, auto debt, and now student loans."

The target for the Dow now is 10,000.

My Trading Rules

I actively trade the FTSE 100, Dow and Gold through spread betting and futures positions. t1ps.com Ltd does not believe that my articles can move the Dow, FTSE 100 or the gold price. If I have an open position or positions on any of the above at the time of publication of an article written by me, the existence of that interest and whether it is long or short will always be declared in the article in the format 'I have a long/short position in the DJIA/the FTSE 100/gold' as appropriate. This is in order to inform readers so that they may assess whether the existence of any such interest may have influenced the content of the article. Such disclosure does not constitute investment advice. The time of publication means the time at which an email containing the article is sent.

After publication of an article containing a disclosure of an open interest as above I may alter, or close the position or positions the subject of the disclosure without restriction. There are no restrictions on the opening of positions provided that any open interest is declared as above.

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Bill Adlard is the editor of Chart-Guide.com, and renowned as a world expert in detailed Technical Analysis, particularly the area of Elliott Waves. For a complete guide to Elliott Wave and Bill's up to the minute analysis and recommendations, for as little as £90 a year click here.