When I wrote about the second appearance of the VIX sell signal this year, I mentioned that this signal is not directly correlated on a day-to-day basis with market action. It can take a couple of weeks for the decline to materialize.

The market did go higher, as I postulated that it might, and we saw extreme bullishness at the peak, which, by the way, is common. Things always look the rosiest at the top, and the bleakest at the bottom.

That's just the way that it is.

I warned about the extreme overbought conditions on April 23. In my mind, at that particular juncture, it was simply too early to declare that the VIX sell signal had failed. The extremely overbought technicals added to the likelihood that we'd get a selloff, and were not, as the bulls suggested, evidence of the "strength" of the bull market.

Quite the contrary.

This market has come down since my comments on April 23rd. We did not see the typical beginning of the month strength in early May that is common nearly every month.

The market is weak, and likely to gather momentum on the downside.

In March of last year, as it appeared to me that the end of Primary Wave 1 down was complete, I gave my targets in time and price for the top of Primary Wave 2.

Those targets seemed nearly unbelievable at the time. The market had been crashing for months. The financial system was ever so close to coming completely unglued. And I was forecasting a year long rally that would see the S&P 500 soar from its lows of 666 to 1,228, a mind boggling gain of about 84%?

At the time, with all the turmoil in the financial system and the economy, that forecast seemed like it should simply be laughed at and discarded as borderline absurd.

We never did get to my number of 1,228.73, but wow, did we get close, reaching an intraday high of 1,219.80 on April 26, less than ten points from my target.

Remember the above when I present my forecast for where the stock market is headed in the next year or so.

Just as the forecast for that gigantic rally seemed absurd at the time it was issued, the forecast for the decline is going to seem equally absurd.

But it is what it is.

We've had a year of "improving" earnings.

We've had a year of seeing the effects of the stimulus.

We've had our green shoots of recovery.

We've been told daily that the economy has turned the corner.

The mainstream financial media have been pounding into our collective heads that the worst is behind us and that all things financial are on the mend.

We've had a magnificent stock market rally that the talking heads on TV have pointed to over and over again as "proof" that the economy is improving.

Well, the green shoots, the talk of the economy improving, the stock market rally, all of it may fool you into thinking that the worst is behind us.

But they don't fool me. I know better.

Unfortunately, on the downside, Wave 3 is every bit as bad, and typically worse, than Wave 1.

My forecast for both the economy and the stock market is very dismal for the next year or more.

I believe that the Primary Wave 2 rally is over. I believe we have started Primary Wave 3 down. That fact will become ever more clear to an ever greater number of people with each passing week and month.

As investors recognize the change in trend, an increasing number of them will flee risk and seek shelter, trying to avoid the unfolding economic disaster.

I wish that my forecast was not so grim.

I wish that I could be the bearer of good news.

I wish that our "leaders" did not bring us to this particular point in history by following the path they have followed for years.

But all of my wishing will not change reality.

Having said all that, and having mentally prepared you for my dire forecast, I will now lay it out here:

Primary Wave 1 down lasted from October, 2007 to March, 2009, or almost 18 months. Primary Wave 1 dropped from 1576.09 (intraday high on S&P500) to the intraday low of 666.79, or a loss of 909.30 points.

Primary Wave 3 should be at least as large (point-wise) as Primary Wave 1 was.

That's a loss of 909.30 points from the start of the wave.

Take the intraday high of Primary Wave 2, or 1,219.80, and subtract  909.30 from it and you arrive at 310.5.

That's my target for Primary Wave 3 down.

Grim, I know. But it is what it is.

From a time perspective, Primary Wave 2 was 13 months. A .618 time factor applied would be about 8 months.

So I am looking for Primary Wave 3 to reach a low of 310.5 somewhere between 8 and 13 months (which is between .618 and equal the length of Primary Wave 2) from the high. That would put the low in the time frame of December, 2010 and May, 2011.

We will narrow it down in time once we get closer.

On March 10, 2009, I eagerly stated, "We've got a very nice rally ahead of us. Let's enjoy it and make some profits on the long side."

I now must not-so-eagerly say this: We've got a very severe decline ahead of us. Let's prepare for the worst, make some tremendous profits on the short side, and do as much as humanly possible to help those around us make it through this very difficult period.

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