1987 Part Deux

The sp500 is still trading in a bearish flag structure.  Volume has been light recently and the ‘market head games’ continue.  The market still looks extremely bearish to me and I see no reason to say we are at bottom now.

My attempt at the BOT long signal last week clearly failed.  The market tried to trick me into thinking we had hit bottom.  The chart in  particular that was confusing me was the Nasdaq 100 index.  It was clear to see that the August 9th, 2011 low was a retest of the very large inverse head and shoulders bottoming formation and it started to conjure up all sorts of bullish scenarios from a technical standpoint.

But the reality is that the monthlies are still bearish, the weeklies are bearish and the dailies are likely to roll over bearish again soon.  So ‘stay the course bearish’ appears to be the correct call going forward.

I am noticing again probably for the umpteenth time that we have a 1987 crash pattern signature possibly at work. Once again I have to state that every single time in the past I have noticed this similarity it has not resulted in the expected outcome.  Will this time be different ?  A stock market crash is always a very improbable outcome because of the extreme rarity.  In addition it just seems to obvious right now.  In 1987 no one expected it and it came out of the blue.  Now it seems like bearishness is obvious everywhere especially news wise.

Wbottom

Chart above shows left side 1987 and right side 2011 sp500.  Note the first sharp leg down that created the pattern.  The magnitude was quite different from the 2011 period as compared to 1987 period.

The seasonality is different as well with an offset of about 1 full month.  The initial –8.6% leg down in 1987 ended on September 8th, 1987 (right before the W bottom was formed).  The current period 2011 shows the initial leg down ended on August 8th, 2011.

AFTER THAT INITIAL BOTTOM THE MARKET RALLIED IN ‘W’ BOTTOM FORMATION for ABOUT 1 FULL CALENDAR MONTH BEFORE THE REAL FIREWORKS BEGAN.

For example in the 1987 period it rallied in flag formation or W bottom formation for 1 FULL MONTH (from the initial September 8th, 1987 low) until about October 8th, 1987 before the CRASH.

In the present time frame the market has managed to CONFUSE and DISTRACT also for about 1 FULL MONTH.  Again, the initial bottom was August 8th, 2011.  Presently we find ourselves at September 6th, 2011.

So if history is any guide, then it would suggest that we are only a couple or a few days away from the initiation of one of the greatest stock market crashes in all recorded history.  September 8th, 2011 would fall on this Thursday.

I have to dig into TA of stocks and commodities Edwards and Magee book to see if there is an expected duration for typical bear flags.

192920110906

Note in the chart above I show the 1929 1930 period.  There was also a bear flag that formed on a similar 1 month duration time frame.

The BOTTOM LINE:

Bear flags are very DECEPTIVE and CONFUSING patterns whose purpose is to confuse both bulls and bears and try to shake the tree as much as possible before the REAL drop.

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9 comments on “1987 Part Deux
  1. Tom says:

    As a quick follow up. I counted the exact number of price bars since the peak on July 25 and I come up with 31 price bars. This is very consistent with the number of bars from the August Peak in 1987.

    Seems to confirm we are only a couple or a few days away from total madness in this market.

  2. Geoff says:

    I have to hand it to you. You are persistent. You let my negative comments “roll off your back”. For that you earn my respect. Thanks for your research / comparisons.

    You are clearly predicting a once in a lifetime event and clearly the news backdrop is beyond horrible. With today starting out positive, it might be a strategy to buy extremely cheap, way out of the money puts (with options expiration at the end of next week – – giving 7 market days for your extreme long shot prediction to pan out)

  3. Tom says:

    September might be too much time pressure. But I would say that if the pattern is successful we should really only allow one more day of rally tomorrow and then need to head down right away for this to work.

    Also I forgot to mention we do have a MACD histogram confirmed sell signal similar to that which occurred in 1987.

    I should say though the one thing that still bothers me a lot with the current last months prices are the series of higher lows (4 of them so far) since the Aug 9th low.

  4. ed says:

    Next Monday will be another Bradley turn date that corresponds with a full Moon.

    This indicator has been accurate the last 3 turns and a full moon usually means a trend change to the upside

    Obama’s speech could be the catalyst

  5. JR says:

    The trading range I mentioned on the #SPX 1220-1248 upside and 1100 plus or minus 30 can prove itself if we hit the top range tomorrow.
    In my portfolio, I will sell all and wait and see!
    If it breaks down, then we will look again for the 1100 range to hold if not, then your scenario could be in play.

  6. The lower trendline of the triangle was broken today. Maybe it’s a head-and-shoulders pattern with today as the end of the right shoulder?

    Jürgen Stark resigned from the ECB today, presumably because he thinks they’re throwing good money after bad. The credit-default-swap market says there’s a 90% chance that Greece will default. If that happens over the weekend, “1987 part deux” won’t be such a longshot after all. If not, the sp500 may bounce at 1140 Monday morning and head back into its increasingly-tight trading range.

    I’ve been long RWM since July 1st. Really, I should have stood pat and not done anything else since. It seems quite likely that we will finish September with lower prices than we have now.

    Thank you for writing this blog. Somebody has to take the perma-bear position!

  7. Tom says:

    Today’s action sure does make it look like the real drop would be next week but I cannot help to point out that once again the bears FAILED to create a lower low relative to all the spike lower lows since August 9, 2011.

    Perhaps it is a mute point. But I just wish the bears would accomplish something more dramatic for a change.

    The volume today on the SPY seems to be saying we want to bust south soon.

    Don’t know if market can pull off another 87. There are too many buy programs. Maybe it would just be a very frustrating typical cascade down like 2008.

  8. Tom says:

    But maybe I am not bearish enough? Larry Pesavento indicated the market may retrace all the way down to the 2009 low very quickly.

    But that seems inconceivable to me we could drop that far that fast especially since the 2010 lows are a strong support area.

  9. Geoff says:

    it seems inconceivable to me also (Pesavento idea) but the inconceivable (just breaking the August lows) might really elevate the fear level. i am not positioned to benefit too much from such an event so i guess that means i doubt it will happen. i think probability is around 30% that it might happen – – breaking August lows, say maybe down to 1100 or 1095 (this is the initial target of pug for this part of the down wave – – than a rebound to 1200 or so and than down again to decidedly new lows)

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