Lets Talk about Stock Market Crashes Shall we

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I don’t know what it is about stock market crashes that so fascinates me.  I think a lot of it has to do with the fact that they are exceedingly rare, at least on the daily time frames.  And of course I am talking about stock market indices crashes.  There are always individual stocks that do crashes throughout the year.  But to get a stock market index to do a crash is all too rare.

I was not trading during, before or after the 1987 stock market crash so I cannot tell you what it felt like.  What I have done however is spend a good amount of time looking at the price action that marked that period.  I have also looked at the 1929 time period as well.  But I have to admit that the 1987 period is more fascinating because of the sheer size and persistence of the move.  It is simply jaw dropping.

From a technical standpoint the aspect of the 1987 experience that is the most interesting is how price was able to drop so fast and furiously after having already touched the 200 day moving average.  The drop was so strong and so relentless that it pulled the relative strength index (RSI) indicator to an unbelievable low reading of 11.96.  That is an extremely low reading for RSI for any stock market index.

On October 15, 1987 when the market price touched the 200 day moving average, the market was supposed to bounce off it higher because RSI was already oversold and at the 30 level.  Probably most good technicians would have told you that is what is to be expected.  If I was trading at that time that is probably exactly what I would have told you as well.  But the lesson out of this is that real crashes defy all normal reason and laws of traditional support.  If both you and I and a million other people want to get out of whatever we are in and get out now no matter what price we get then RSI is not going to stop for anyone.  It will just follow the panic selling.

The current market right now just feels like it is trading like a wounded animal.  That is the only way I can describe it.  I have watched tape action for a long long time and I like to think that I can pick up on all the little nuances of daily and intra day failures and confirmations.  But again, the feel in recent days has been of a very sick or wounded animal that is retreating back to its den perhaps to recover in time… or to die… 

It may seem absurd to talk about the market in terms of ‘dying’.  But to a certain degree the market is a living breathing being.  It is built upon money or energy and the confidence of the people who buy and sell it.  If there is a total loss of confidence all at once then one might say that what was previously a healthy living entity can approach near death pretty quickly.

What fascinated me about the May 6, 2010 mini crash was that the trading day started out quite calm and the candlestick was simply showing an ordinary DOJI candlestick.  I watched that candlestick all day long and I saw it bouncing up and down just changing the shape and size of the doji and it seemed pretty harmless.  And it seemed indicative of a turning point for the market to turn back up.

But then all of a sudden the price started to turn negative and then just cascaded into the mini crash.  It was astounding how quickly everything unfolded and it really caught everyone off guard including myself.  But why?  The reason why is probably because the market moves from a state of almost complete tranquility to a DOJI candlestick for half of the day, but then without warning and almost instantly collapses.  That is shocking market action and very unpredictable.

That is why my sense right now is to really NOT trust the seemingly calm and orderly price action of recent days.  It looks so calm and harmless.  But a small doji that forms in the morning can evolve into a 1000 point big red candlestick by the close.

So now we sit just 3 days from a weekend and a Monday just like that time frame in 1987.  Not only that but we have this big astro weekend of May 23, 2010 of the very significant Saturn Jupiter Opposition.  The 23rd is a Sunday.  The last time this opposition occurred Iraq invaded Kuwait and the USA was going to WAR.

So now we have this seemingly similar setup to 1987 we have two trading days before the big astro weekend and a Monday to follow the astro aspect.

So if the cards are right and the stars are aligned correctly then we are about to see a close repeat to 1987 during the next 3 trading days that may strike unprecedented amounts of fear and panic.

I don’t wish to see it happen and this post is only speculating that it may happen based on the setup and pattern similarities and other important hints the market has been giving us.

I am also astonished to tell you that two market veterans whom I listen to regularly and whom I have very high regard for are not predicting such a vicious stock market crash.  In fact they recently have been looking for a minor bounce from the 5/19/2010 price close.

Everything is set up for a repeat of an 87 scenario.

87crashscenario

Update: 5/20/2010  Given todays gap down doji we are following the path of 1987 and now RSI is near the 30 level so it is right at the level where a mega crash can develop.  And at this point you have to ask yourself WHO is going to hold their equities TOMORROW FRIDAY going into the weekend of the Jupiter Saturn Opposition ????  I have seen stranger things happen in the market before, but I would be completely dumbfounded to see the market up very big on Friday tomorrow.  Now one could argue that the market could somehow be up tomorrow on short covering, but my sense is that the shorts missed their chance today given today’s immediate weakness and so they may be somewhat ABSENT on Friday tomorrow to do any big short covering.

Posted in Index Trading, Market Timing, SP500, Trading Psychology
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